Positive growth and supportive financial conditions enabled risky assets to outperform during the quarter. Domestically, large caps outpaced small caps – albeit by a slim margin – and growth stocks outperformed value. International stocks continued to outpace US stocks.
For the 2nd quarter, GDP growth is expected to be about 3%, which is a solid rebound from the 1st quarter’s anemic growth of 1.2%. This is the pattern we have seen play out over the course of the last few years. Strength in job growth continued and the unemployment rate ended June at 4.4%.
The S&P gained 3.1%, the Russell 2000 returned 2.5%, and the MSCI EAFE gained 6.4%. Year to date, the S&P is up 9.3%, the Russell 2000 is up 5.0%, and the MSCI EAFE has gained 14.8%. So far this year, large cap value stocks have returned 4.7% which is lagging large cap growth stocks by nearly 10 percentage points.
Due to oil production increases here in the US, as well as in Libya and Nigeria, oil prices trended lower despite reasonable compliance within OPEC to cut production. At the end of March, the price of oil hovered around $50/barrel. By the quarter’s end, the price had fallen to $44/barrel. Nonetheless, the rise in oil prices year over year could make the energy sector the biggest contributor to S&P earnings growth.
Overall, commodities declined with base and precious metals following energy prices lower. Concerning our two remaining inflation hedges, real estate continues to lag overall stocks, but global infrastructure continues to outperform. Year to date, commodities are off 5.07%, REITS are up 2.86%, and global infrastructure has gained 14.46%.
Bond yields and equity prices remained diverged as the yield curve flattened further. With the Fed raising rates, the short end of the curve pushed higher with 2-year Treasuries increasing 18 basis points to close yielding 1.38%. 30-year Treasuries, however, lost 26 basis points and closed yielding 2.84%. A decline in the long end portends a drop in inflation expectations, which could be translated as an expected decline in growth. While predictions based on the yield curve have had mixed results, combining this with the Fed trimming the money supply, and the duration of the growth cycle raises a cautionary note.
Regardless, risky fixed income assets outperformed high quality bonds with high yield, emerging market bonds, and floating rate debt posting solid results.
Our risk management strategies provided returns that fell in between the returns provided by stocks and bonds. Managed futures continued to lag the group while hedged equity led.
Along with investors’ appetite for risk, implied volatility remained low and investors have benefited from this complacency. We have existed in a sustained period of economic growth with little inflation. As a result, equities have pushed higher and have outpaced other assets. Consequently, remaining disciplined is more difficult, but it is exactly at these times that we must remain diversified.
Washington Trust Bank believes that the information used in this study was obtained from reliable sources, but we do not guarantee its accuracy. Neither the information nor any opinion expressed constitutes a solicitation for business or a recommendation of the purchase or sale of securities or commodities.
Rick Cloutier, CFA is the Chief Investment Strategist for Washington Trust Bank with over 20 years of portfolio management and investment experience. Rick designs and implements investment and risk management strategies for the bank’s clients. Rick has written numerous articles for Investopedia and wrote a weekly column for the Fall River Herald News in Massachusetts. His research has appeared in numerous journals, including the Journal of Investment Management and Financial Innovations, as well as, the International Journal of Revenue Management. He provided a nightly commentary on WALE radio and authored the novel Caveat Emptor. Rick earned his MBA at Boston University.