Equity markets around the world produced solid returns again this quarter. International equities led the way as the global economy appears to be strengthening. Although the Federal Reserve raised its target for short-term rates for the third time in seven months, intermediate and long-term interest rates initially declined and ended the quarter down slightly from levels at the end of March. Volatility was extremely low for most of the quarter.

Second quarter economic growth improved, although recent releases of economic data are not signaling the strong re-bound that many expected after another weak first quarter. At this point it appears we are headed for another year of moderate economic growth. Economic data releases in late June indicated that inflation eased for the third consecutive month, raising doubts as to whether inflation is likely to be as high as the Federal Reserve expects. There were also some potentially troubling recent signals from auto sales and housing.

The global economy does appear to be improving and slowly building momentum. China continues to be an area for concern as policymakers there are taking steps to rein in very high debt levels. In addition to the impact of any slow-down in China’s economy on the global economy, Chinese corporations have used increased leverage to buy assets outside of China. This makes it more likely that any turmoil in China will impact other economies and markets. We are also closely watching Europe, where several bank failures were met with indifference as investors continue to have faith that central banks are in control.

Markets ended the quarter with some trepidation after comments from several developed market central banks indicated that the long run of ultra-loose monetary policy might be coming to an end. If correct, this will mark the end of a massive monetary policy experiment and the beginning of the unwinding of years of stimulus. Markets continue to have faith that policymakers will be able to change direction and begin withdrawing unprecedented liquidity without causing major instability in world markets.

Corporate earnings reports for the first quarter were strong. Current stock valuations are pricing in continued earnings growth for the rest of this year and 2018. We will be closely watching second quarter earnings releases as we assess the outlook for full year earnings. We will also watch consumer and business confidence for any impact from increased policy uncertainty related to taxes, health care, trade, regulatory reform and another debt ceiling confrontation later this year. Growing debt at the federal, state and local level is another concern. Any significant policy disappointments would present a headwind for stocks.

Investors are currently assuming no major upheaval out of Washington and that none of the long list of geopolitical concerns will have a significant impact on the global economy. We continue to be concerned that equity valuations are at elevated levels. While near-term equity returns are heavily influenced by breaking news, events and traders, valuations are generally more predictive of longer-term returns. Given elevated prices, looking ahead we would expect some moderation in returns for stocks.