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So Far, No Harm! What's Next?

Investment returns were relatively strong in the 2nd quarter (continued strength from 1Q17). Risk assets (stocks) led the way with Non-US stocks outperforming US stocks.

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Emerging Markets +6.4% (+18.6% YTD) performance was driven mostly by Emerging Asia. Developed Europe returned +6.4% (+14.2% YTD) due to improving economic and earning data. Attractive valuations relative to the US add to the prospect of better future returns abroad (*reason we increased our Non-US stock allocation late last year). US large cap +3.1% (+9.3% YTD), driven largely by the technology sector, outperformed US small cap +2.5% (+5.0% YTD). Growth stocks significantly outperformed value across all market caps (Dividend payers underperformed).

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Bonds also contributed to positive performance, but underperformed stocks. High Yield bonds rallied +3.2% as rates fell (remember inverse relationship like two kids on a seesaw). US Aggregate bonds returned a modest +1.4% as 10-year Treasury rates fell to 2.15. 

 Commodities were the sole negative return as oil prices fell steeply amidst concerns over a supply glut stemming from persistent US production. Importantly, cash returned just 0.2% YTD, meaning that investors sitting on the sidelines would have missed out on healthy returns across a wide array of asset classes thus far in 2017.

What does the rest of the year look like? Trend-like growth and favorable financial conditions combine to create a supportive case for stocks (best start since 2011). European, Japanese and emerging market stocks are the most attractive relative to the US and UK. Look for stocks to outperform bonds globally; corporate bonds (credit) will outperform governments (sovereign debt). 

 

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Martin Palomo serves as Wealth Strategist & Investment Officer at Pinnacle Trust.  He is also a member of the Investment Committee. You can reach Martin by emailing him at mpalomo@pinntrust.com or by calling the office at 601-957-0323.