The third quarter of 2017 saw equity and fixed-income markets continue their upward momentum, both here in the U.S. and abroad. It has been a banner year thus far for risk assets, by most measures. In September, the Federal Reserve announced a much-anticipated plan to begin the unwinding of its balance sheet (starting in October) and stood pat on interest rates. This news was digested with little market agitation. Overall, the third quarter was relatively smooth in terms of volatility, despite devastating hurricanes and escalating political tensions around North Korea.
Returns shown in the chart above are for the third quarter of 2017.
Source: Morningstar®, data as of September 30, 2017.
The S&P 500 Index of U.S. large-cap stocks ended on a positive note for the eighth consecutive quarter, gaining 4.5%. Small-cap stocks, represented by the Russell 2000 Index, climbed 5.7% and outperformed large-cap stocks for the first time this year. Growth-oriented sectors such as technology continued to lead, with growth stocks (Russell 1000 Growth Index +5.9%) continuing to outpace value stocks (Russell 1000 Value Index +3.1%). It has been a challenging period for portfolios that maintain a value bias; however, the tide against value stocks can quickly and resoundingly change.
International and emerging stocks generated outstanding performance again this quarter, helped by a weaker U.S. dollar (which boosted returns for U.S. investors in overseas markets). The MSCI EAFE Index, representing international-developed stocks, returned +5.4% in U.S. dollar terms (+3.4% in local currency terms). In international markets, value stocks outperformed growth stocks this quarter; the MSCI EAFE Value Index climbed +5.9% ahead of the MSCI EAFE Growth Index return of +4.9%. Emerging-markets equities were the biggest winners in the quarter, with the MSCI Emerging Market Index up a whopping +7.9% in U.S. dollar terms (+7.6% in local currency terms).
On the fixed-income side, the Fed’s decision not to hike interest rates was a nonevent. The yield curve slightly flattened; the 2-year Treasury yield increased by +9 basis points (bps) to 1.47%, while the 10-year Treasury yield increased +2 bps to 2.33% over the course of the quarter, and investment-grade U.S. bonds, represented by the Bloomberg Barclays Aggregate Index, gained +0.8%. Across the fixed-income spectrum, emerging debt (JPM GBI-EM Global Diversified Index UH) performed the best, up +3.6%. High-yield bonds (BofAML US HY C Pay BB-B Constd Index) gained +1.9%, as credit spreads continued to narrow. Municipal bonds (BBgBarc Municipal 1-10Y Blend 1-12Y) also gained modestly, returning +0.7% in the third quarter.*
Source: Morningstar®, data as of September 30, 2017.
Investors have enjoyed very strong market performance so far this year, and looking to the future, one of the biggest questions looming overhead is: how long can this last? It is tempting to look at past market cycles to make predictions about what will happen next; indeed, many pundits have been predicting that a crash is coming soon! They are often wrong but seldom uncertain — and like a stopped clock, they will be right at some point. Meanwhile, maintaining a well-diversified portfolio with exposure to stocks and bonds across the globe would have reaped the rewards the market has offered so far this year.
We believe that an investment philosophy should be strategically designed for the long term, based on an investor’s personal goals and objectives; so that when the next downturn comes — and it will — their portfolio will be in a better position to weather it, especially after participating in strong markets like those we experienced last quarter.
Read our summary of market performance from the second quarter of 2017
*All return data represented in this market summary was sourced from Morningstar®, as of September 30, 2017.
U.S. Stock Market: Russell 3000 Index
International Developed Stocks: MSCI EAFE NR Index
Emerging Markets Stocks: MSCI EM NR Index
U.S. Bond Market: Barclays Aggregate Index
Emerging Markets Bonds: JPM GBI EM Global Divers TR Unhedged
Return data represent past performance and are not indicative of future results. Historical returns of indices do not reflect applicable transaction, management or other applicable fees, the incurrence of which would decrease historical performance results. Index information has been compiled by Hewins from sources Hewins deems reliable, but has not been independently verified. Historical performance results for investment indices and/or categories have been provided for general comparison purposes only. Indices are unmanaged. It is not possible to invest directly into an index. Any charts and graphs represented herein are for informational purposes only and cannot in and of themselves be used to determine which securities to purchase or sell, or when to purchase or sell securities.
