Decline in oil prices had the greatest impact on the market last quarter

As we look back at the second quarter, several events — political and otherwise — affected the markets. These events included France’s election of a new president; President Trump’s release of a proposed tax plan; and Britain’s election, in which the prime minister’s party lost seats in Parliament. But arguably, the factor that had the greatest impact on the market, across multiple asset classes, was the sharp decline in oil prices. The spot price dropped more than 14 percent, from $50.54 per barrel to $43.24 per barrel, according to the U.S. Energy Information Administration. The change in price is likely due to excess oil supply, especially in the United States, where the number of oil rigs has increased for 22 consecutive weeks.

These lower oil prices have had the effect of a tax cut for Western consumers, which helps explain the strong performance of equities in the second quarter. U.S. equities returned 3.1 percent (S&P 500 Index), non-U.S. developed markets returned 6.1 percent (MSCI EAFE Index) and emerging markets returned 6.3 percent (MSCI Emerging Markets Index).

“Despite geopolitical turbulence and political change around the world, capital markets remained quite strong overall.”

Lower oil prices can also mean lower inflation. Indeed, we see the market forecasting lower inflation today than three months ago. Lower inflation means that prices for goods and services will rise at a slower rate, but it also translates to lower nominal bond yields: the yield on a 10-year Treasury note decreased from 2.39 percent to 2.31 percent. At the end of the first quarter, the difference in yield between a 20-year nominal Treasury note and a 20-year inflation-protected Treasury note was 2.0 percent (this is called the breakeven inflation rate, or the market’s best guess at inflation over the next 20 years). At the end of the second quarter, the breakeven inflation rate had declined to 1.8 percent.

During the most recent quarter, we continued to see an upward trend in the markets, even after such historical events as the Dow Jones crossing the 20,000 mark in the first quarter of 2017. Despite geopolitical turbulence and political change around the world, capital markets remained quite strong overall. This resiliency reminds us that market movements cannot be accurately predicted, nor should their ups and downs come as a surprise. That’s why we follow the philosophy we do — and why our work focuses on designing a plan that withstands the test of time.