Despite disappointing economic growth in the first quarter and a string of uninspiring jobs reports, domestic stock markets continued reaching record highs. The S&P 500 was up 3.09% in the 2nd quarter and has gained 9.34% year-to-date. International markets rallied following the Dutch and French election outcomes due to optimism that the wave of populism may be ebbing across Europe. The MSCI EAFE was up 6.31% in the 2nd quarter and has gained 14.22% year-to-date. Market results have been surprising given the lackluster economic backdrop and Washington’s slow progress on anticipated policy actions. While we do not believe stocks are necessarily overvalued, especially if policy initiatives come to pass, we have continued to trim equities on market strength to keep asset allocations at levels commensurate with risk exposures agreed upon with our customers.
Interest rates have declined as a result of the less than optimal economic results. The bond market seems to be telling a different story than the stock market, and only time will tell which one is correct. The 10-year Treasury yield was 2.30% on June 30th, down from 2.40% at the start of the quarter. The Federal Open Market Committee (FOMC) increased rates at their June 14th meeting, but the pace of future rate hikes remains an open question. Inflation remains below target, but the unemployment rate would suggest full employment. The FOMC will continue to be data dependent for the upcoming months.
Stock market volatility has been very low. In May, the VIX (volatility index) recorded the second lowest monthly average in its 27-year history. There have only been four days where market returns have increased or decreased more than 1%. History would suggest that this cannot persist. We continue to expect volatility to return to normal levels where corrections of 5% and 10% occur with more frequency. It is not uncommon for corrections of 5% or more to happen two or three times a year, and historically, corrections of greater than 10% have occurred once per year on average. No one can predict when the next correction will occur and markets may continue to march higher claiming fresh all-time highs along the way. In the meantime, we are content harvesting gains when markets are up so we are well positioned when the inevitable correction does indeed occur.
Our long-term view that stocks represent the best opportunity to build wealth remains unchanged. Inflation remains the key long-term risk to our customers achieving their investment goals. Tactically, we remain overweight domestic stocks and underweight international stocks, though we recently increased this exposure slightly.
As always, if it has been a while since you have visited with us about your financial goals, please feel free to contact your account administrator to review your account and determine if the current allocation is still appropriate for your circumstances.Some trust products and IRA contributions/balances are not a deposit, not FDIC insured by any federal government agency, not guaranteed by the bank and may go down in value.