Quarterly Client Letter – Q2 2017
- June 30, 2017
- Investment Insight
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Dear O’Brien Wealth Partners Investor,
This bull isn’t ready to slow down quite yet! Many of our clients are experiencing “bull market fatigue”; the longer the markets go up, the more nervous they become as they wait for the next downturn. While it is true that we are well into the third longest bull market in history, duration will likely not dictate when it finishes; growth normally does. While this recovery has been one of the longest, it has also been the slowest and shallowest in history in terms of growth. As nominal global growth continued to strengthen in the last quarter, investors focused on the underlying economic fundamentals, which for the most part appear quite solid.
Equities around the world continued their climb from the first quarter supported by this accelerating global growth, improving earnings and continued loose credit conditions. The strongest performance in the equity markets came from outside the U.S., as both developed and emerging markets saw returns more than double those of domestic stocks. The U.S. dollar, which has long been a headwind for investing abroad, provided a healthy tailwind in the second quarter for U.S.-based investors. Emerging market equities were one of the top performing asset-classes of the quarter, boosted by a falling dollar and stabilization in countries previously in crisis (Brazil, Russia, and Argentina). The Eurozone also performed well over the quarter, shaking off the uncertainty of Brexit’s effect on the EU and focusing on the pro-growth victory of Emmanuel Macron in France. With the populist tide dammed for the moment the region was able to stretch its legs, with growth supported by a strengthened European consumer.
The pick-up in growth synchronized across the globe in the second quarter to produce a nominal global GPD growth rate closing in on 6% – the highest it has been in the last 6 calendar years. Historically, this has been a positive sign for the markets as corporate earnings track global GPD fairly closely. The Institute of Supply Management surveys of industrial production support this increase in growth, with production rising fairly evenly around the world. Industrial production is typically seen as a good proxy for future corporate sales and a good sign that this growth should not be fleeting. Inflation, a key metric in nominal growth, is finally beginning to pick up in developed countries, while it simultaneously cools down in the more overheated emerging markets.
The bond market continues to be a bit of a puzzle for investors as the Fed struggles to impact longer-dated yields. Despite three rate increases since December the 10-year treasury yield has actually come down. Fed officials are hoping for inflation to get back to target levels to help coax longer-term yields back up to historically normalized levels. Rock-bottom and even negative yields outside the U.S. are increasing the demand for U.S. bonds. Despite their historically low levels, they are still some of the highest in the world!
So what does this all mean for your portfolios? While 2016 favored U.S. equities over international equities, O’Brien’s longer term commitment to overseas markets was favorable to our clients’ portfolios in 2017 as these markets continued their outperformance from Q1. Your portfolio’s allocations to international equities boosted returns versus domestic indices and returns were further boosted by our active managers, as almost all of them added additional value over their respective benchmarks. Lower correlations and higher dispersion among stocks create an environment where active management can prove their mettle, and they have delivered so far in 2017. O’Brien’s embrace of both passive vehicles for low-cost market exposure, paired with well-researched and carefully thought out allocations to active managers, continue to create value for our clients. Within our clients’ bond portfolios risk exposures outside of intermediate-term investment grade bonds such as high yield and securitized debt added to returns. We are pleased that our portfolios are thriving in this surging market, even as we look to the future and continue to increase the quality of the portfolio to weather upcoming storms. If you have any questions or would like to discuss the specifics of your portfolio, please contact your O’Brien Advisor.
Your O’Brien Wealth Partners LLC Investment Team