Markets chugged along nicely in the first quarter of 2017, with global equities and bonds all turning in positive returns. Robust economic data from the U.S., as well as optimism about the new administration’s economic policies, were among the factors cited for the U.S. markets’ continued rally. With all the focus around domestic news, the strong resurgence of international-developed and emerging-markets equities is a boon to globally diversified portfolios that must not be overlooked!
The S&P 500 Index of U.S. large-company stocks gained +6.1% in the first quarter. In a reversal from last quarter, small-cap stocks, represented by the Russell 2000 Index, lagged large-cap stocks, returning just +2.5%. Growth stocks, buoyed by the strong performance of the technology sector, outperformed value stocks in the large- and small-cap segments of the U.S. market (the Russell 1000 Growth Index was up +8.9% versus the Russell 1000 Value Index’s return of +3.3%).
As noted earlier, international stocks had a very strong quarter, with the MSCI EAFE Index returning +7.2%. The outperformance of growth stocks relative to value stocks carried over to international- developed markets; the MSCI EAFE Growth Index returned +8.5% for the quarter versus the MSCI EAFE Value Index’s return of 6.1%. However, the real standout performers this quarter were emerging-markets stocks, which delivered double-digit returns; the MSCI Emerging Markets Index returned +11.5%. U.S. investors in international stocks were also helped by the dollar depreciating against most major currencies, which added to their returns in US$ terms.
On the fixed-income side, the Fed raised rates in March; however, the impact of this rate hike was fairly muted, resulting in a slight flattening of the yield curve. At the shorter end of the curve, the 2-year Treasury note yield inched up seven basis points over the course of the quarter from 1.20% to 1.27%. At the longer end of the curve, the 10-year Treasury note yield declined by five basis points, ending the quarter at 2.40%. Overall, intermediate bonds were up for the quarter, with the Barclays Aggregate Index of domestic investment-grade bonds gaining +0.8%. Municipal bonds fared even better, with the Barclays Municipal Bond Index gaining +1.6%.
Both segments of diversified fixed income delivered solid returns. High-yield bonds gained +2.3% for the quarter, as credit spreads continued to narrow. Emerging-markets bonds, helped by a declining dollar, logged in an impressive +6.5% (JPM GBI-EM Global Diversified Index UH).
In 2016, investors experienced the benefit of maintaining exposure to small-cap and value stocks, whereas in the first quarter of 2017, they saw the benefit of maintaining an allocation to both international-developed and emerging-markets stocks. We don’t know what the future holds for the financial markets, but we do know that maintaining a diversified portfolio is a time-tested recipe for long-term success!