3 Observations on Q2 and Thinking Forward

Wednesday, July 19, 2017 |

Recapping what happened in Q2 with a focus on the quarters and years ahead:

  1. International looks closer to turning the corner with some sense of stability looking forward.  The trend of outperformance vs. the US continues and now both Emerging and Developed have outperformed over a 12-month period.  As I stated in the past, there are tailwinds that play into this which will likely will be supportive moving forward: USD bull market is losing steam and attractive valuations.
  2. The S&P 500 continues to power higher… along with valuations. The Forward P/E is at 18.90 versus the historical average of 16.  Not at a parabolic level, but high.  This shouldn’t be an issue as long as earnings are solid, which they have been.  However, expectations are high (12% Q4 growth) so if estimates drift lower and harder than in prior quarters the market could react negatively.  Likewise, longer-term metrics show something similar.  In short, returns have a good probability of being below the historical average in both the short (unless we have a speculative blow off) and long term.
  3. The bond market continued to move up even though the Fed raised rates; however, longer-rates may have found a bottom and broke the intermediate-term downtrend.  In the long-term, bonds historically return what they currently yield so there isn’t much upside when the 10-Year is currently yielding around 2.30%.  That said, while we may have seen a long-term low in interest rates the climb up is likely to be long and drawn out.


 

Chart Source: Wall Street Journal, Morningstar Direct

An exchange-traded fund (ETF) is a security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange. Investors must buy or sell ETF shares in the secondary market with the assistance of a stockbroker. In doing so, the investor will incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.

International investing involves special risks, including, but not limited to, currency fluctuations, economic instability, and political uncertainties, not typically present with domestic investments.

Morgan Stanley Capital International (MSCI) EAFE Index (Europe, Australasia and Far East) is an index created by Morgan Stanley Capital International (MSCI) that serves as a benchmark of the performance in major international equity markets as represented by major MSCI indexes from Europe, Australia and Southeast Asia.

The MSCI Emerging Markets Index is an index created by Morgan Stanley Capital International (MSCI) and is a float-adjusted market capitalization index that is designed to measure equity market performance in emerging markets. It consists of indices in 23 emerging market country indexes: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Thailand, Turkey and Arab Emirates.

S&P 500 Index is an index of 500 of the largest exchange-traded stocks in the US from a broad range of industries whose collective performance mirrors the overall stock market.

Russel 2000 is an index that measures the performance of the small-cap segments of the US equity universe. It is a subset of the Russell 3000 and includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership.

Barclays U.S. Aggregate Bond Index is a composite of four major sub-indexes: US Government Index, US Credit Index, US Mortgage-Backed Securities Index, and US Asset-Based Securities Index, including securities that are of investment grade quality or better, have at least one year to maturity, and have an outstanding par value of at least $100 million.

The bond market is volatile and carries interest rate, inflation, liquidity and call risks. As interest rates rise, bond prices usually fall, and vice versa. Change in credit quality of the issuer may lead to default or lower security prices. Any bond sold or redeemed prior to maturity may be subject to loss.

Investors cannot invest directly in an index. Past performance is no guarantee of future results.

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Forward P/E - Forward price to earnings (forward P/E) is a measure of the price-to-earnings (P/E) ratio using forecasted earnings for the P/E calculation. While the earnings used are just an estimate and are not as reliable as current earnings data, there is still benefit in estimated P/E analysis. The forecasted earnings used in the formula can either be for the next 12 months or for the next full-year fiscal period

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