While media remains fixated on the White House, the markets during Q2 were more attuned to corporate results and central bank activity. Investors saw solid gains and a smooth ride with the S&P returning 3.1% for the quarter – it was never up or down more than 2% in any of the three months. International stocks outperformed the United States for a second straight quarter.

Markets Focus on Corporate Growth, Not Politics

While much of the world’s attention has been focused on Trump and the administration’s next steps, the market has been more focused on economic and corporate growth than speculation around politics. Earnings growth for the S&P 500 during the third quarter is estimated at a healthy 6.6%, supporting high valuations and rising prices. With yields near all-time lows on much of the curve, the upside from owning bonds has decreased, but we believe they offer valuable diversification from stocks and should be a part of most portfolios.

U.S. Stocks, Central Banks & Timing the Market

U.S stocks are relatively expensive right now with the S&P’s PE ratio sitting at 25 (as of July 10, 2017) For stocks to produce further gains, either earnings must increase or valuations must get more extreme. One challenge to this is that profit margins are already at or above multi-decade highs for a multitude of reasons, ranging from stagnant wages to low interest rates on debt to tech-driven lowered costs.

Central banks have been instrumental in fueling this bull market. The Fed raised short rates by 0.25% in June, also announcing plans to shrink its balance sheet by letting bonds mature without replacing them, which created a mild headwind for stock and bond prices. The European Central Bank began to hint at its intention to start reducing monthly stimulus purchases, which drove the Euro and global bonds higher.

Some investors are frightened by all-time highs in stock prices and remain on the sidelines or maintain very high cash allocations. In our view, this is the classic mistake of trying to time the market, and one may end badly for those who try.