Investment & Economic Update | June 30, 2017

July 7, 2017|Kathleen Lakritz

The Economy: Economic growth continues at modest pace

The U.S. economy grew at a modest 1.4% annualized rate in the first quarter of 2017. Despite the underwhelming rate of growth, the current economic expansion is now entering its ninth year, making it the third longest on record. The path of this expansion has been uneven, with various soft patches along the way. Recent data is reflecting some disappointment. For instance, the most recent report for durable goods orders showed a 1.1% decline.

Despite the fits and starts, the economy’s multi-year progress has added jobs and has pulled the unemployment rate down significantly. The latest reading in May 2017 was 4.3% versus the peak unemployment rate of 10% in early 2009. While the employment data has improved, Federal Reserve officials are disappointed that inflation has stayed below their target levels for a robust economy. Fed chief Janet Yellen thinks a strong labor market may eventually push inflation to their target rate of 2%.

The Stock Market: Stocks continue to rally to record highs

The momentum of the stock market rally that was ignited after the election of Donald Trump as president has continued into the second quarter of 2017.

The popular S&P 500 Index (large company stocks) gained 3.09% in the second quarter, bringing the six-month year-to-date gain to 9.34%. Mid and small company stocks had slightly lesser gains of 1.97% for the S&P MidCap 400 Index and 1.71% for the S&P SmallCap 600 Index, resulting in six-month year-to-date returns of 5.99% and 2.79% respectively. International stocks (as reflected in the MSCI Europe Australia Far East Index) continued their rebound with a solid gain of 5.03% in the second quarter of 2017, and a year-to-date return of 11.83%.

While stock prices have reached record levels and valuations have climbed, the prospect of higher earnings has kept the market trending upward. This potential for earnings growth has also provided resilience to weak economic reports and political challenges. As in any market environment, equity investors should be prepared for price volatility. History shows that stock investments are rewarding for long-term investors with a diversified stock portfolio.

The Bond Market: The Fed lifts interest rates in June

The Federal Reserve policymakers increased the benchmark federal fund rate in June by one-quarter percentage point to a range between 1.00% and 1.25%. This marked the fourth increase in this cycle since December 2015. The federal funds target rate increases occurred as follows: December 2015, December 2016, March 2017 and then this latest move in June 2017.

Expectations are for additional rate increases this year and next as the Federal Reserve long-term plan is to normalize rates, after being held down to near zero from the end of 2008 through most of 2015.The yield on the two-year Treasury note ended June 30, 2017, at a 1.38% yield, up from its yield of 1.20% at the beginning of this year. However the 10-year Treasury yield fell to 2.31% on June 30, 2017, down from its yield of 2.45% at the beginning of the year. Economists attribute low inflation expectations (driven in large part by declining crude oil prices) as a factor keeping longer-term yields down. The rise in short-term rates and the decline in long-term rates has resulted in a very flat yield curve.

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Tags: Investments