August 2017

Financial Market Roundup

Produced by Fifth Third's Investment Management Group

Trends at a Glance

Global Trends

Central Bank Policy

Equity Performance

Interest Rates and Growth

Political and Regulatory Trends

Investment Trends

In the following piece, Fifth Third's Investment Management Group recaps the market and how it reacted to various events in the month of July. I hope you find this Financial Market Roundup helpful and informative.

Global Trends

The European Union warned that it could retaliate against the U.S. “within a matter of days” should the country unilaterally toughen sanctions against Russia, saying EU-based companies risk becoming collateral damage. The latest updraft of trans-Atlantic tensions follow sharp disagreements over Trump’s “America First” agenda, including his protectionist tilt, his withdrawal from an international treaty to fight climate change and his criticism of European defense spending.

Central Bank Policy

In their July meeting, Federal Reserve officials said they would begin running off their $4.5 trillion balance sheet “relatively soon” and left their benchmark policy rate unchanged as they monitor progress toward their inflation goal of 2 percent. After cutting the main interest rate to zero in December 2008, the Fed bought trillions of dollars of debt-securities to lower long-term borrowing costs. Many investors believe the start of balance-sheet normalization could begin as early as September of this year.

Equity Performance

U.S. stocks scored gains of approximately 2 percent for the month July, with the S&P 500 now up over 10 percent year-to-date. Like large cap domestics stocks, international stocks are also making new all-time highs as global growth prospects improve. But with valuations well above historical averages (especially in the U.S.), monetary policy poised to turn hawkish and the U.S. administration plagued by controversy there remains a degree of caution in financial markets.

Interest Rates and Growth

The yield on the 10-year Treasury moved slightly higher to finish the month of July at 2.29 percent following the Fed’s decision to leave short-term interest rates unchanged. Gross domestic product rose at a 2.6 percent annualized rate from the prior quarter but first-quarter growth was revised down to 1.2 percent from 1.4 percent. Consumer spending, the biggest part of the U.S. economy, grew 2.8 percent, benefiting from a steady job market.

Political and Regulatory Trends

A shortage of new single-family homes across the U.S. is pushing up prices (approx. 6 percent over the last 12 months), potentially pricing some buyers out of the market. The Senate debate that took place at the end-of-July showed just how sharply divided the GOP remains over health care, which is not a good sign for the potential for tax reform.

Investment Trends

The decline in inflation expectations and the dollar, lack of legislative progress, flattening yield curve and falling commodity prices have weighed on small caps more than large caps in 2017 because of the over-representation of energy producers and regional banks in smaller-cap indices. This would help explain why we’re seeing a boom in the renovations of existing homes. Americans are expected to spend about 7 percent more on home remodeling this year compared to last, leading many investors to overweight the hardware industry, during a time when demographics favor the overall housing sector.

Market commentary provided by Fifth Third Bank. Source of statistics is Bloomberg.com. Returns are calculated from market close on 7/1/17 through 7/31/17. This information is current as of the date of this letter and the opinions expressed are subject to change at any time, based on market and other conditions. This information is intended for educational purposes only and does not constitute the rendering of investment advice or specific recommendations on investment activities and trading. The mention of a specific security within this letter is not intended as a solicitation to buy or sell the specific security. Index performance shown within this letter is not representative of any Fifth Third managed account.

Investing involves risk, including the possible loss of principal invested. Diversification does not assure or guarantee better performance and cannot eliminate the risk of investment loss. Past performance is no guarantee of future results.

Indexes are unmanaged, do not incur investment management fees, do not represent the performance of any particular investment, and may not be invested directly into by investors. Small company investing involves specific risks not necessarily encountered in large company investing such as increased volatility. Investments in foreign markets entail special risks such as currency, political, economic and market risks.

Consumer Price Index (CPI) - measures changes in the price level of a market basket of consumer goods and services purchased by households.

DJIA/DOW – the Dow Jones Industrial Average is a price weighted average of 30 blue-chip stocks that are generally the leaders in their industry.

Fed – The Federal Reserve System (FRS) is the central bank of the United States and is commonly known as “The Fed”. It regulates the U.S. monetary and financial system. The Fed's mandate is to promote sustainable growth, high levels of employment, stability of prices to help preserve the purchasing power of the dollar and moderate long-term interest rates.

Federal Funds Rate (Fed Funds) – The interest rate at which depository institutions actively trade balances held at the Federal Reserve.

FOMC – The Federal Open Market Committee is the policy-making branch of the Federal Reserve that reviews economic and financial conditions and determines an appropriate stance of monetary policy by setting a target for the federal funds rate. GDP – Gross domestic product is the market value of the goods and services produced by labor and property located in the United States.

GDP – Gross domestic product is the market value of the goods and services produced by labor and property located in the United States.

Gold Index - is the U.S. dollar per Troy ounce.

MSCI EMF (Emerging Markets Free) Index – is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. As of June 2006 the MSCI Emerging Markets Index consisted of the following 25 emerging market country indices: Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Jordan, Korea, Malaysia, Mexico, Morocco, Pakistan, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey.

MSCI US REIT Index – is a free float- adjusted market capitalization weighted index that is comprised of equity REITs that are included in the MSCI US Investable Market 2500 Index, with the exception of specialty equity REITs that do not generate a majority of their revenue and income from real estate rental and leasing operations. The index represents approximately 85% of the US REIT universe.

MSCI World Index – is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets. The MSCI World Index consists of the following 24 developed market country indices: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain,Sweden, Switzerland, the United Kingdom, and the United States.

Oil ($ barrel)/WTI – Bloomberg USCRWTIC Index representing West Texas Intermediate (WTI) Cushing Crude Oil Spot Price.

Organization of Petroleum Exporting Countries (OPEC) - is a group consisting of 12 of the world's major oil-exporting nations. OPEC aims to manage the supply of oil in an effort to set the price of oil on the world market, in order to avoid fluctuations that might affect the economies of both producing and purchasing countries.

S&P 500 Index – The Standard and Poor’s 500 index is a capitalization weighted index of 500 benchmark stocks and is often used as a measure of the overall U.S. stock market.

US Treasury – A debt obligation backed by the U.S. government with a fixed interest rate and a maturity between one and 10 years.

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