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A “risk-on” sentiment generally prevailed among investors, and stocks rallied across the board. Investor demand for yield continued to drive outperformance among riskier fixed-income sectors and securities. Meanwhile, the Federal Reserve (the Fed) held interest rates steady and announced an October start date for balance sheet normalization.
Positive earnings and economic data continued to stoke investor optimism and fuel gains among U.S. stocks. Overall, earnings reports released during the quarter showed profits for S&P 500® Index companies advanced by double digits in the April-June period—the second-consecutive quarter of double-digit earnings growth. In addition, annualized gross domestic product (GDP) growth accelerated to 3.1% in the second quarter, up from 1.2% in the first quarter and the fastest pace in two years. Against this backdrop, the S&P 500 Index achieved several milestones, including closing above the 2,500 level for the first time. The index returned +4.48% for the three-month period, posting its eighth-consecutive quarterly gain.
Stock performance outside the U.S. was even stronger, particularly in emerging markets (EM). Non-U.S. developed market stocks (MSCI EAFE Index) gained +5.40%, while EM stocks (MSCI Emerging Markets Index) rallied +7.89%. Europe was a main driver of EAFE performance, as positive revenue and earnings performance, resilient economic growth, and continued central bank support aided stock returns. Meanwhile, the cyclical upturn in the global economy, steady capital flows, improving business fundamentals, generally positive corporate earnings, and rising oil prices boosted stocks in developing markets.
U.S. bonds continued to advance, returning +0.85% (Bloomberg Barclays U.S. Aggregate Bond Index). Fed policy uncertainty, low inflation, and bouts of safe-haven demand triggered by North Korea’s military aggression drove U.S. Treasury yields lower for much of the quarter. However, yields reversed course in September, as the Fed hinted at more rate hikes and Congress considered pro-growth tax reform. Returns for all major U.S. bond market sectors remained positive. Corporate bonds were top performers, benefiting from the favorable earnings backdrop and investor demand for yield. Weak inflation and continued central bank stimulus in Europe and Japan helped drive non-U.S. developed-market bond returns modestly higher, while the "risk-on" sentiment led to outperformance for EM bonds. Continued weakness in the U.S. dollar versus most major currencies lifted non-U.S. bond returns for unhedged U.S.-based investors.
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The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.
Generally, as interest rates rise, the value of the securities held in the fund will decline. The opposite is true when interest rates decline.
International investing involves special risks, such as political instability and currency fluctuations. Investing in emerging markets may accentuate these risks.
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Source: Bloomberg Index Services Ltd
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