Second Quarter 2017 – “Momentum”
Markets around the world ended the quarter on a high note, with the S&P 500, MSCI EAFE, and MSCI Emerging Markets Index appreciating 3.1%, 6.1%, and 6.3%, respectively. Investors’ appetite for risk assets continued and volatility reached record lows as they shrugged off concerns about politics, equity valuations, and lingering debt issues. In the US growth remained steady. There were incremental improvements in employment and earnings. Additionally, small business sentiment readings and manufacturing activity held above where they were twelve months ago. Even so, the economy seemed unable to develop enough momentum to jump into a higher level of growth. The Trump Administration’s pro-growth policies, including tax reform and deregulation, have the potential to be impactful, but have yet to be fully implemented. Conversely, economic growth outside the US, particularly in Europe and the emerging markets, seems to have picked up dramatically. According to Eurostat, Eurozone growth came in at anannualized rate of 1.8%, outpacing the annualized US growth rate by 0.7%. Meanwhile, the World Bank in their most recent reports estimated emerging markets as a whole will grow by 4.1%; led by a 7.1% growth rate in Bangladesh, a 6.8% rate in India, and a 6.7% rate in China. Given the aforementioned growth trends, we believe the global economy is in a period of synchronized global expansion. While we wouldn’t make any predictions about the durability of this synchronization, as central banks back away from quantitative easing, or, conversely, predict how much additional positive momentum synchronization can create, long-term investors now face a much starker divide between risk and volatility. While return opportunities may have been dampened by a lower volatility environment, risks (such as economic conditions and/or the impact of leverage and liquidity) may not necessarily have been lowered to the same degree. Thus, long-term-oriented investors have to resist the urge to take on imprudent risks for only incremental gains in return.