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ECONOMIC FLASH – Foreign Stocks and Bonds Stay in the Lead

August 2017

US Economy: Growth emerges from winter funk.

As we anticipated, US Q2 GDP growth rebounded (+2.6%) to fastest pace since Q3 2016, on strong consumer spending. Inflation, however, remains stubbornly low.

US Stocks: Telecom leads equities to new highs.

Roughly 75% of S&P 500 companies have beaten Q2 2017 earnings estimates. The telecom sector returned nearly 6%, despite ongoing price wars that are helping to keep US inflation below 2%, the Fed’s target rate. Verizon (+10%) bested new subscriber estimates by more than 500,000.

Foreign Stocks: Help from stimulus.

Central banks in the Eurozone and Japan calmed investor worries by maintaining commitment to stimulus policies. In addition, stronger foreign currencies boosted returns on unhedged or non-dollar-denominated foreign stocks.

Fixed Income: EM bonds in demand.

As US interest rates barely moved, demand for higher-yielding debt and stronger foreign currencies made emerging markets debt (+1.8%) among the top performers.

Non-Traditional: Oil and gold rebound.

Oil rose above $50 for the first time since May and gold also performed well, as the falling US dollar lifted the value of commodities priced in dollars.


The rebound in US growth indicates the stable footing of the economy; however, the under-3% pace underscores that fiscal policy changes are needed — in the form of tax reform and/or infrastructure spending — to bump growth to 3% or more.

Within equities, strong corporate earnings have come through as we expected and should support high valuations in the 2nd half of 2017. That said, recent strong results will make for difficult comparisons as we move into 2018.

Within fixed income, we still think the direction for interest rates is up, but the steepness of the path and the duration of the climb are likely to be less than we initially expected, given that inflation is likely to remain low and demand for yield high.

Glossary and Disclaimer for Economic Flash

Equities Total Return

U.S. Large Cap 2.1% 11.6% 16.0%
U.S. Small Cap 0.7% 5.8% 18.4%
U.S. Growth 2.5% 16.5% 18.0%
U.S. Value 1.3% 5.6% 14.2%
Int’l Developed 2.9% 17.1% 17.8%
Emerging Markets 6.0% 25.5% 24.8%

Fixed Income Total Return

U.S. Agg. Bond 0.4% 2.7% (0.5%)
TIPS 0.4% 1.3% (1.0%)
U.S. High Yield 1.2% 6.1% 11.3%
Int’l Developed 2.6% 7.9% (4.4%)
Emerging Markets 1.8% 8.2% 3.1%
Intermediate Munis 0.7% 3.7% 0.7%
Munis Broad Mkt 0.7% 4.2% 0.3%

Non-Traditional Assets Total Return

Commodities 2.3% (3.1%) 0.8%
REITs 1.3% 6.2% (2.3%)
Hedge Funds
Absolute Return 0.5% 1.9% 1.8%
Overall HF Market 0.9% 3.5% 5.5%
Managed Futures 0.7% (2.8%) (10.4%)

Economic Indicators

JULY-17 JAN-17 JULY-16
Equity Volatility 10.3 12.0 11.9
Implied Inflation 1.8% 2.1% 1.5%
Gold Spot $/OZ $1269 $1211 $1351
Oil ($/BBL) $53 $56 $42
U.S. Dollar Index 89.7 94.7 90.9

Our Take