The first half of 2017 has been good to investors in financial assets. Bonds and stocks rallied even as the Fed raised rates and talked about shrinking its $4.5 trillion balance sheet. Barclay's AGG, a total bond index was +2.1%. The S&P 500 +8.1%.

Growth continued to outperform value despite a late June sell off in technology stocks. Five technology stocks accounted for 28% of the S&P 500‘s return through 6-30-2017.

Over the past century value stocks on average outperformed growth stocks, but this has not been the case since 2005 according to Barron’s magazine. While that may change, it would require a more vibrant economy as growth stocks rule in a low inflation, slow growth world.

U.S. 10-year note yields dropped to 2.29% down from 2.44% at year end. German 10 year bunds have risen 73 basis points over the past year and yield 0.55%, while Japanese 10 year bonds yield 0.09%. One can argue the U.S. rates are currently this low, due to the fact that European and Japanese rates are absurdly low.

Unemployment dropped to 4.3% and U.S. GDP growth remained stubbornly below 2% coming in at 1.4% in Q1 2017.

So far in 2017, we have seen no tax cuts, no repatriation of overseas corporate cash, no infrastructure bill and no health care reform.

Investors await legislation on some or all of these fronts and have been very patient for results. The political divide seemingly allows only a narrow path to a positive conclusion. If we have stalemate in 2017, we doubt the political landscape in 2018 will prove to be easier.

Most foreign stock markets have rallied year to date. The U.S. dollar weakened by 6% on a trade weighted basis. The World Bank forecasts 2.7% global growth in 2017. They forecast advanced economies will gain 1.9% while emerging market and developing economies are expected to improve by 4.1%.

Comparisons of key financial measures indicate that foreign markets are cheaper than the U.S. stock market. U.S. stocks trade at 17.4x forward SPX earnings above the past 5 and 10 year averages but below the 2000 peak of 26X.

Oil prices have dropped about 20% year over year due to rising U.S. oil production. This is akin to a tax cut for consumers and helps keep a lid on inflation.

Bitcoin, a digital currency has rallied 170% year to date as more attention is being paid to crypto currencies. Blockchain technology, a non-centralized and non-regulated method to verify economic transactions between parties, is being explored by some in the banking community, major corporations and wealthy individuals. Investment implications may be similar to early stage internet development, but are far from clear.

The U.S. has begun to challenge trading partners to consider the broader impact of imbalanced trade flows. Trade surplus countries like China, Germany and Mexico have taken notice. The Middle East continues to roil with regional conflict. North Korea appears to be willing to provoke fellow Koreans, Japan and the U.S.

The Fed is about to end its buying of additional Mortgage backed and U.S. Treasury bonds as soon as September. They will likely will not raise rates again until December. We should find out soon how markets react to this policy change.

Can the stock market continue to rise with headwinds from the Fed? Are slowing auto sales and rising loan loss provisions a sign that the 9-year recovery is coming to an end?

Our belief is that as long as profits continue to climb and the hope of lower taxes is ahead, only a policy mistake or an outside threat will derail this aging bull market.

S&P 500 companies are expected to report 8% Q2 earning growth on a 4% revenue gain, according to Thomson Reuters. They also look for growth of 8.6% and 13.1% in Q3 and Q4. In 2018, Thomson Reuters anticipates another earnings gain of 11.7%.

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