Q2 2017 Quarterly Review

Q2 2017 Quarterly Review: Slow and Steady

Equity market growth slowed during Q2 as central bank activity ramped up and political activity remained stagnant. The MSCI All Country World Index returned 3.6% for the
quarter. Pro-business and fiscal reform candidate Emmanuel Macron won the French elections and gained a parliamentary majority, soothing political fears in Europe. The UK
officially began Brexit discussions, but Prime Minister Theresa May struggled to gain significant support after losing parliamentary seats in the June snap elections. The US Federal
Reserve confirmed market expectations and raised interest rates. The lack of headline surprises supported stock price growth through the end of May before prices began to stall.
The delay of the US Senate’s vote on a new healthcare bill and comments from foreign central bankers indicating potential interest rate hikes led to a pullback in stocks and a
significant sell-off in the global bond markets.

Domestic Equities

U.S. stocks continued to gain despite some mixed economic data and amid political uncertainty over the ability of the US administration to push through its fiscally expansive
policies. Popular “Trump Trades” saw muted gains as investors became wary of delays in the administration’s policy timeline. Former FBI director James Comey’s testimony rattled
the markets but quickly became a non-event. The expected Fed rate hike had little effect on the markets, but the announcement of plans to reduce the balance sheet caused a
short-term pullback. The S&P 500 recorded a total return of 3.1% over the quarter. The DJIA posted gains of 3.9%, and the NASDAQ returned 4.2%. Large-cap equities
outperformed mid and small caps. The Russell Mid Cap Index returned 2.7% and the Russell Small Cap Index returned 2.9%. Healthcare, industrials, and financials were the top performing
sectors, while energy, telecommunication services, and consumer staples underperformed.

Foreign Equities

Foreign equities continued their strong 2017 performance during Q2. The Eurozone led the way for developed markets with the MSCI EMU index returning 6.4%. Political risk was the
focus at the beginning of the quarter, but with Emmanuel Macron winning the presidential election, markets responded positively. Additionally, signs of growing breadth in the
monetary union’s economic recovery supported equity gains. The UK equity market was volatile during the quarter as uncertainty over the future path of monetary policy and the
political agenda related to the Brexit weighed on the region’s economic outlook. The FTSE 100 hit an all-time high before falling late in the quarter and ending down -0.1%. After
recovering from a slowdown in early April, the Japanese market trended upwards for most of the quarter and ended 6% higher. The gains were driven by a majority of Japanese
companies reporting profits above expectations and an improved economic outlook from businesses and the Bank of Japan. Emerging markets performed well during the quarter,
benefitting from US dollar weakness. The MSCI EM Index returned 5.5%. China was a key contributor to Q2 returns. The Chinese markets saw robust gains supported by improving
economic data and an increase in investor sentiment towards the region following MSCI’s decision to include China’s A-shares in its indexes. The rest of the BRIC underperformed.
Brazil returned -7.3% amidst further political turmoil, and Russia returned -11.3% driven by weaker energy prices.

Fixed Income

In fixed income, government bond yields were well-supported for much of the period and were virtually unaffected by the Fed’s rate hike. Long-term yields declined while short-term
rates have risen causing a flattening in the yield curve. In late June, the Bank of Canada and the European Central Bank hinted that they are open to adjusting monetary policy
supports and potentially raising rates. These unexpected comments led to a global bond sell-off and sent interest rates higher. Domestically, the news made US fixed income less
attractive to foreign investors and led to the dollar experiencing its largest quarterly decline in nearly seven years. The Barclays US Agg Index returned 1.5%. US corporate high
yields performed slightly better but spreads between high yield and investment grade bonds being near historical lows muted returns. The Barclays Corporate High Yield Index
returned 2.2%. Global bonds performed well despite the late June sell-off. The Barclays Global Agg ex US returned 3.5%. Emerging market bonds performed better in local
currency terms due to US dollar weakness. The Barclays EM Local Issue Index returned 2.4% while the Barclays EM USD Agg returned 1.8%.

Alternative Investments

Commodities underperformed during the quarter. Base metals retreated from Q1 highs following reports of weaker construction activity in China. Precious metals were relatively flat
for the quarter with the LBMA Gold Spot price declining -0.2%. Oil was the largest detractor in the commodities sector. West Texas Intermediate spot oil prices fell -10.5 percent
following reports of OPEC countries producing over restriction levels and a rebound in US shale production. Overall the S&P GSCI Index returned -5.46%. Real estate held on to
positive returns despite the positive swing in interest rates. The Dow Jones US Real Estate Index returned 1.6%. Hedge funds posted mixed returns for the quarter. Overall, the
HFRI Composite Index returned 0.4%. Equity hedged strategies were the top performing sub-strategy with returns of 2.3%, and Macro strategies were the worst performing sub strategy
with returns of -0.7%.

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