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Market Data Bank

2nd Quarter 2017


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The S&P 500, a key to growth of capital in broadly diversified portfolios for the long run, posted a 3.1% gain in the second quarter of 2017, following a 6.1% gain in the first quarter.

 


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A gap between the top-performing large-cap growth and the laggards, mid- and small- and large-cap value marked the second quarter.

 


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Health care stocks, in the quarter ended June 30, 2017, continued their recovery from a slump in the fourth-quarter of 2016, following President Donald Trump’s campaign statements about reining in excessive price increases.

 


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For the quarter ended June 30, 2017, major foreign indexes beat the U.S. stock market, as the global economic outlook continued to brighten.

 


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Non-U.S. stocks returned 6.1% in second quarter, nearly double twice the next-best performing asset class, U.S. stocks.

Lower crude oil prices depressed commodities stocks and Master Limited Partnerships, a vehicle for investing in energy companies.

Fixed-income assets all posted positive returns, as bond yields were stable during the quarter.

 


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Total return on the S&P 500 since 1926 has averaged about 10%, making the 9.3% return in the first half of 2017 an exceptionally strong start to the year.

As 2017 started, the rally was driven initially by the promise of a major tax reform and slashing of regulations governing business.

But by the end of the first quarter, a Congressional stalemate over health care reform, which had been expected to finance tax cuts, dashed hopes for tax reform.

Despite this disappointment, a stream of strong economic reports repeatedly propelled stocks to new highs in the second quarter.

 


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In the six months ended June 30, 2017, there was a wide gap between best-performing large-cap growth and the laggards, small- and mid-cap value.

Categorizing stocks by their main characteristics — valuation and market capitalization —  returns in the first half of 2017 was a mirror image of the previous six months, where large-cap growth stocks were the laggards.

 


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Facebook, Amazon, Netflix and Google — “FANG” stocks — staged a comeback and gained more than 17% in the first half of the year.

Health care stocks, which account for a sixth of gross domestic product — also rebounded sharply and gained 16.2%.

Energy stocks were the big losers among industry sectors.

Domestic oil production has become more efficient and more U.S. rigs are in operation, yet the average price of a barrel of oil has stayed below $50 per barrel.

While that’s not good for oil stocks, it is a very positive development for the U.S. economy in the long run.

 


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In a complete reversal from the fourth quarter of 2016, China, Emerging Markets, Europe, and Asia Pacific all outperformed the U.S. indices in the six months ended June 30, 2017.

 


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In the six months ended June 30, 2017, stocks were the best-performing among this diverse group of 13 asset classes, and the world’s major stock markets all rallied strongly.

The major non-U.S. stock markets beat the big categories of U.S stocks.

Foreign economies posted improving economic data and their stock markets caught up with the fourth-quarter “Trump rally” in U.S. stocks.

Gold stocks returned 7.4%, reversing a fourth-quarter 2016 slump.

Oil, MLPs and commodities all posted negative returns.

The S&P 500 index rallied 9.3% in the first half of 2017, following a 3.8% fourth-quarter gain, all of it coming post-election.

Leveraged loans, high-yield bonds and munis posted additional gains following their fourth-quarter 2016 rallies, as investor appetite for riskier investments grew.

Across the spectrum of fixed-income investments, returns turned positive, in a reversal of the loss suffered in the fourth-quarter of 2016.

 


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Stocks returned 17.9% over the 12 months ended June 30, 2017. Earnings of the S&P 500 recovered fully from the complete collapse in 2016 of profits at energy and mining companies.

In the third quarter of 2016, stocks rallied on a surprisingly strong July jobs report and leveled off through the end of September.

Stocks rallied again in the fourth quarter of 2016, and yet again in the first quarter of 2017, on a string of good news: the Trump era promised lower taxes, less regulation and economic growth; OPEC a cut oil production; third-quarter GDP growth of 3.5% was higher than expected, and better-than-expected economic data was coming in month after month.

The second quarter of 2017’s stock market gains came more gradually, as first-quarter GDP growth softened to 1.4%. But investors looked past the near-term figure and focused instead on the strong outlook for the remaining three quarters of 2017, and first-quarter earnings beat Wall Street analysts’ expectations. Despite political controversy gripping Washington, D.C., the S&P 500 stock index ended the second-quarter of 2017 near an all-time high, as economic fundamentals pointed to growth and low inflation through 2018.

The 12-month period ended June 30, 2017, like all bull market runs, defied expectations. Confounding expectations, investors in stocks enjoyed a 17.9% return.

 


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But the 18% gain in the S&P 500 in the 12 months ended June 30th, 2017, sounds impressive, but U.S. stocks became the laggards among global stock markets, and China’s stock market was at the top of the world’s rankings.

Fears of a global recession were misguided: the U.S. recovery spread to the rest of the world and foreign stock markets caught up with the U.S.

With the benefit of 20-20 hindsight, the quick turnabout in performance of asset classes and styles of stocks over the 12 months ended June 30 offers insight into why rebalancing and strategic asset allocation are so important to investment success.

 


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On June 30, 2016, investors awoke to this picture of the 12-month performance of major global stock markets.

The U.S. economy had led the world back from the global financial crisis in a slow, seven-year recovery, and the stock prices of America’s largest publicly held companies moved the S&P 500 higher over the previous 12 months.

But the rest of the world economy was not as strong.

As the summer of 2016 began, fears of a global recession were sweeping across global stock markets, hitting China’s manufacturing economy hardest.

Over the 12 months ending June 30th, 2016, China’s fledgling stock market had suffered a 21% loss.

Fast forward one year to June 30th, 2017, and suddenly a total turnabout has occurred.

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In the 12 months ended June 30th, 2017, China’s stock market delivered a 29.6% return, compared to a 21.2% loss in the 12 months ended June 30th, 2016.

The U.S. went from being the leader among major global stock markets a year earlier, to being the laggard in the more recent 12-month period.

 


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Sudden turnabouts are not uncommon in investing.

For example, on June 30th, 2016, the biggest loser among different styles of U.S. stocks, was small-cap growth, which suffered a loss of six-tenths of 1% over the previous 12 months.

In the 12 months ended June 30th, 2017, small-cap growth stocks were the biggest winners, with a 22.9% total return.

 


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A sudden turnabout also occurred in stock sectors of different U.S. industries.

Financial stocks were the dogs of the 12-month period that ended June 30th, 2016, when they dropped in value by 4.2%.

But in the 12 months ended June 30th, 2017, they were the darlings with a 35.4% total return.

 


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You don’t have to be a Nobel laureate to know that the times are always changing, and you don’t have to be a financial genius to see how to invest wisely to navigate the course of eternal change in the world.

 


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Strategic asset allocation and rebalancing ensure you buy lagging assets.

You’re always preparing for today’s laggards to snap back, as happened in the instances highlighted here.

This is a secret of investment success because it prepares you for surprises.

Even though it sounds so easy and obvious, it is difficult to do.

 


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If you’re saving for retirement or to achieve other long-term goals, the stock market is a like a path with steep ups and downs.

At points in the long journey, you may feel like the stock market is just going to keep heading higher.

 


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And, at other points, when stock prices plunge, you may feel like the stock market is just going to keep going down.

 


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In a frightful descent, you don’t know when or even if a bottom will come, and it may seem like there is no way out but crashing.

 


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While the past is never guaranteed to be repeated, stocks have always reversed even the steepest and longest of price drops.

 


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If you're on a path with steep ups and downs, you are more likely never to get where you're trying to go.

 


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Instead of taking the path through the steep highs and frightful crashes, strategic asset allocation and rebalancing help ensure you buy lagging assets when they decline in value.

You’re prepared in case today’s laggards snap back, as happened in the instances highlighted here.

This is a secret of investment success because it prepares you for surprises.

 


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The possibility of rising interest rates and the post-election chance of a significant rollback of the Dodd-Frank legislation drove financial stocks higher during the 12 months ended June 30, 2017.

The laggards during the 12 months — telecom, consumer staples and utilities — are generally less risky and more defensive than the other industry sectors, which were rewarded for their higher risk with higher returns as the economy continued to expand.

The energy sector slumped as crude oil prices retraced some of 2016’s recovery.

 


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After trading sideways from approximately mid-2015 to mid-2016 — and suffering two one-day, double-digit plunges — stock prices broke out in the second half of 2016.

Over the last five years, including dividends, the S&P 500 total return index just about doubled, gaining 98%. Without dividends reinvested, the gain in stock prices was 78%.

The likelihood of a bear market — a decline in value of at least 20% — increases as the bull market grows older. But fundamental economic conditions that have accompanied bear markets in the past were not present as the third-quarter of 2017 began.

Precursors of bear markets historically — restrictive Fed policy, markedly slower growth, stock price overvaluation, and irrational exuberance — were not yet evident as the third quarter of 2017 began.

 


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For the five years ended June 30, 2017, small-caps were in first place.

Small-caps’ return to leadership reflects investors’ improved confidence in the economic outlook and a preference for riskier assets following years of fears inspired by the global financial crisis and The Great Recession in its wake.

 


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In the five years ended June 30, 2017, the lagging sectors — energy, materials, telecom services and utilities — mainly were defensive industries less susceptible to changes in the economy. Their earnings growth lagged economically-sensitive sectors.

In a sign that the deepest wounds sustained in The Great Recession of 2008 and 2009 were finally fully healed, financials, the most battered industry in the global crisis, was the No. 1 performer among the 10 industry categories over the five-year period.

Stocks in the energy and raw materials industries were slammed by the collapse in price of crude oil and other commodities during the recession, and they have not recovered. The price of crude oil, while up nearly 100% from its early 2016 bottom of $26 per barrel, is still less than half of its peak 2014 price of $114 per barrel.

The large disparity in returns between the leading and lagging sectors shows why strategic asset allocation and rebalancing are smart way to smooth out portfolio risk systematically.

 


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For the five years ended June 30, 2017, the U.S. indexes — small-, mid- and large-cap — outperformed other major global stock markets by a substantial margin. Owning shares in foreign stock markets held back returns on diversified portfolios. However, in the last year of the five-year period, foreign stocks closed the performance gap and the outlook for growth worldwide improved.

The other change in the rotation in diversified portfolios is that small companies are outperforming large-caps. Over the decades, investors in smaller companies with higher growth were paid a premium for taking on the additional risk of investing in companies at a smaller capitalization. The small-cap premium disappeared in the mid-1990s and has not returned until recently, as small-caps moved into the lead of the performance ranking for the five-year period.


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The dominance of U.S. stocks over the long-term is stark in this view of investments across 13 asset classes over the five years through June 30, 2017.

The S&P 500 index’s total return of 98% over the five years is twice the S&P Global ex-U.S. stock market’s return of 49%. This is a testament to how resilient the U.S. economy came out of the last severe global recession, compared to the rest of the world economies.

Keep in mind, you cannot plan on this performance gap continuing in the future. In fact, planning for a change in leadership over the next five years is the prudent course. Non-U.S. stock markets led the performance in the 12 months ended June 30, 2017, and major world economies were expected to show stronger growth relative to the U.S. through the end of 2017.

Crude oil remains the laggard. Fundamental factors driving the price of oil changed materially in recent years. A shale-fracking revolution in the U.S. changed global supply materially, and the U.S. is such a large producer of fossil fuels that it can drive global prices down when they are over $40 or $45 a barrel.

 


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On December 19th, 2016, Barron’s published its annual outlook for the year ahead, featuring forecasts from 10 “top” Wall Street investment strategists.

Every year, the respected financial weekly publishes its panel’s stock market predictions, including the industry sectors they advise buying and avoiding.

How has Wall Street’s advice performed?

Poorly.

 


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Fritz Meyer is an independent economist, whose research we license and who has tracked the Wall Street strategists’ sector forecasts in Barron’s annually since 2005.

Meyer was an investment strategist at one of the world's largest investment companies for over a decade before going independent in 2009.

With no products to sell except his research, Meyer's data tracking the performance of recommendations made by big retail brokerage firms offers a rare look at the success of following Wall Street's investment advice.

Year after year, since 2005, the so-called top strategists’ recommendations have performed poorly compared to a diversified portfolio.

 


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If Wall Street’s strategists’ sector advice from the last nine years had been correct, then the dots would lie along the red line.

The random performance of Wall Street’s advice is plain to see in Meyer’s research.

 


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If Wall Street’s strategists’ sector advice from the last nine years had been correct, then the dots would lie along the red line.

The random performance of Wall Street’s advice is plain to see in Meyer’s research.


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Meyer’s analysis illustrates that the predictions of Wall Street’s so-called “top” strategists’ are about as reliable at sector forecasting as monkeys throwing darts.

That’s why we invest based on a strategic, evidence-based discipline and choose to be independent of any Wall Street retail brokerage.


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We are independent financial professionals, communicating at a frequency attuned to you.

 


 
1st Quarter 2017
4th Quarter 2016
3rd Quarter 2016
2nd Quarter 2016
1st Quarter 2016

This article was written by a professional financial journalist for William Howard & Co. Financial Advisors, Inc. and is not intended as legal or investment advice.
@2017 Advisor Products Inc. All Rights Reserved.

 

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