Investor Insights: June 2017

By Bobby Moyer, CFA, CFP®, CAIA

Bobby Moyer, CFA, CFP®, CAIA

Bobby Moyer, CFA, CFP®, CAIA Director of Research Senior Portfolio Manager

See our recap of May's key statistics and market commentary to help guide your investment decisions. 

 

Noteworthy Numbers

S&P 500 Index YTDThe S&P 500 Total Return has posted positive returns every month this year. The index is now positive by 8.66 percent year-to-date. (Source: Morningstar Direct)

 

Consumer Spending IncreasedU.S. consumer spending recorded its biggest increase in four months during April. The Commerce Department announced that consumer spending increased by 0.4 percent in April, and upwardly revised March to 0.3 percent.

 

GDP Annualized RateThe Bureau of Economic Analysis announced that the second estimate of Gross Domestic Product (GDP) was revised higher to an annualized rate of 1.2 percent during the first quarter of 2017. The first estimate showed the growth rate at 0.7 percent.


Our Take

The markets continued to post positive returns in May, but it was not without some volatility. The New York Times reported that President Trump had asked then FBI Director James Comey to stop the investigation into former National Security Advisor Michael Flynn. This caused some to believe Trump could be charged with obstruction of justice and potentially impeached. Whether or not this extreme scenario plays out, Trump’s pro-growth economic agenda could be compromised. The markets reacted to this risk with the largest single day drop of U.S. markets since October of 2016. The S&P 500 and Dow Jones Industrial Average both fell by 1.8 percent on May 17th. Despite the large single-day drop, the S&P 500 Total Return finished the month positive for the seventh straight month, as it has in 14 of the last 15 months.

Investor hopes for sweeping pro-growth legislation are all but on hold for the time being. Whether you believe the swirl of Trump controversies are the result of media hysterics, unforced errors or legitimately nefarious actions, the reality is that everything Russia-related will hang a cloud over the White House for the foreseeable future. Lingering suspicions over Trump will make it even harder to pass big pieces of legislation. The one event Trump could call a legislative success—the GOP health care bill passing through the House in May—will likely be short-lived as the bill’s future looks bleak in the Senate.  

President Trump had his first international trip, which included his first G-7 meeting. As we have come to expect, the trip had some controversies and some verbal exchanges with other leaders. The relationship between President Trump and German Chancellor Angela Merkel is off to a rocky start. True to his campaign rhetoric, Trump continues to cast dispersions on the economic and military alliances the U.S. has with Western Europe.

In early May, the French decisively elected Emanuel Macron as their next President. Macron is the youngest elected French president, but more importantly he was the candidate that markets preferred. The election was viewed as a referendum on status in the European Union: Macron argued for remaining in the European Union while his opponent argued for departure. In addition to the favorable political news in Europe, the economy grew at around two percent during the first quarter, outpacing U.S. growth. These positive developments have contributed to strong market gains. The MSCI EAFE, a proxy for developed international countries, was positive by 3.67 percent in May and is now positive by 14.01 percent year-to-date. As further evidence of an improving economic picture in Europe, FactSet reported that of the 11 Dow companies that reported earnings from Europe during the first quarter, five reported year-over-year growth of revenue in Europe. This represents the highest number on a quarterly basis since the third quarter of 2014.

Americans looking for other political systems they can still look down upon need to look no further than Venezuela and Brazil. Venezuela’s Nicolas Maduro was able to calm his people from violent protests, but this is only expected to be temporary. If Maduro is not removed from office, expect more violent clashes in the coming months. In Brazil, President Temer was expected to bring about economic and political reforms and rid the country of corruption. So, when evidence of his own bribery scandal hit the news, Brazil’s stock market plummeted, falling double digits in a single day before recovering slightly. The iShares MSCI Brazil ETF that serves as a proxy for the Brazilian stock market finished the month down 5.06 percent. Despite the political corruption, it is believed that either Temer or his successor will advance much needed economic reforms that will ultimately benefit the Brazilian economy. Other areas of emerging markets continued to perform very well, with the MSCI Emerging Markets Index returning 2.96 percent for the month and is now positive by 17.25 percent year-to-date.

The Federal Reserve voted to keep interest rates the same during their May meeting and continued to signal a positive outlook on the economy. One area of concern that the Fed sees is the short-term trend of decelerating inflation. If the Fed continues to see weak inflation indicators we may see a delay in the next rate hike. Despite this risk, the economy appears strong enough for another rate hike this month. The Fed also gave some ideas of how they might reduce the balance sheet in the future. There was no clear guidance as to when they might begin this process, but with continued economic growth a slow reduction in the balance sheet could begin as early as the end of 2017.

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