Market Volatility Shows its Face Again as Q2 Ends

By Horizon Investments

The U.S. economy during the first quarter of 2017 grew at a faster pace than initially reported, according to data released last week. U.S. GDP increased at a 1.4% annual rate (versus the 1.2% rate reported in May) due in large part to stronger consumer spending. Although that growth rate was low relative to several recent quarters, it beat analysts’ expectations.

In the U.S., equities posted small losses for the week as faltering tech stocks pulled down the market. The technology sector once again came under pressure on investors’ continued worries about tech stocks’ valuations in the wake of their run-up earlier this year.

Additionally, last Tuesday’s decision by the Senate to postpone the vote on its controversial healthcare bill had some investors worried about the prospect of tax reform happening this year. They argue there may not be enough time to pass tax reform, given Congress’ late summer vacation followed by debt ceiling issues to address near Labor Day.

After impressive results from the Fed’s annual “stress test” on some of the nation’s largest banks, many of those banks immediately announced aggressive share buybacks and dividend increases for shareholders. Those announcements helped bank shares rally.

In the fixed-income markets, global interest rates rose after the European Central Bank president suggested that European economic strength could prompt the ECB to start winding down its fiscal stimulus policies. Likewise, the head of the Bank of England indicated that the BOE may raise rates in the coming months if the UK economy continued to strengthen.

Those statements, coupled with a Fed that has already started raising rates, prompted investors to sell bonds—pushing down their prices and boosting their yields. Longer-duration securities that are most sensitive to changes in interest rates suffered the worst returns. In addition, the euro rose sharply against the U.S. dollar in the wake of the statements.

GAIN: Active Asset Allocation

As U.S. markets faltered toward the end of last week on tech stock losses, it’s important to keep in mind that the Gain portfolios are globally diversified. Throughout the year, we have gradually increased the portfolios’ international allocation, which recently stood at nearly 50% of assets. Direct Eurozone exposure benefited relative performance last week, as developed international markets were bolstered by signs of continued strength in European economies.