Equity Markets Supported by Steady Interest Rates and Growing Economies

The first half of 2017 has been good for stocks and, as of today, Q3 is starting off well as the Fed is holding its course, and earnings reports for the second quarter are expected to be solid across most industries. There are, and have been, some headwinds but the markets, based on a solid economy and steady interest rates, are climbing the wall of worry.

The major U.S. stock indices were up about 3% for the quarter and 9% for the first half. Within the broader indices growth (read tech) beat value, and large cap beat small cap, both significantly. As overseas economies found their footing over the first half of 2017, foreign stocks did well in both quarters of the first half of the year. The broad international index was up 6% for the quarter and nearly 14% for the half year. The broad domestic bond index wasn’t up much in Q2 but up 2% for the first six months.

So, what next after a strong start to the year? All signs continue to point to slow but solid economic growth domestically and overseas, and steady interest rates with little inflation. This is a great environment for stocks and, even though the Fed has signaled another small hike in short term interest rates, the long end of the yield curve is having a typically subdued reaction, so bonds should continue to do their job.

We still feel that stock market valuations are full by historical standards but not overly so. As long as interest rates stay low and economies continue to grow stock prices should generally be supported, barring any unnerving exogenous events. Still, it’s important to rebalance some price extended positions into better valued investments.