Q1 2017 Returns
U.S. Large Cap Stocks
S&P 500 Index
U.S. Mid Cap Stocks
Morningstar MidCap Index
U.S. Small Cap Stocks
Morningstar Small Cap Index
U.S Real Estate
Morningstar REIT Index
MSCI EAFE Index
Emerging Mkts Stocks
MSCI Emerging Markets Index
U.S. Bond Markets
Barclays US Agg Bond Index
*Performance through 4/11/2017
U.S Large Cap Growth
U.S. Large Cap Value
U.S. Mid Caps
U.S. Small Caps
High Yield Bond
Inflation Protected Bond
U.S. Real Estate
Global Markets: Neutral but Optimistic
The old rule of thumb used to be that we expected the world to follow U.S. Markets. If that were to play out today, we might anticipate good performance, especially in developed markets in 2017. Despite improving economic factors, in Europe and Asia in particular, every day we hear new news of instability, terror attacks, disrupted trade agreements, and military posturing. So while we like what we see economically, we harbor great concern for how fragile many areas of the world are at this time. Strides that have been made in economic and market performance around the world could get derailed by these potential threats. However, we have faith that many of these potential pitfalls will be averted, and the good economic performance we have seen can be sustained.
U.S. Economy – Good
The key factors we track, unemployment, housing, and inflation, are all favorable. Unemployment is now in the 4.7% range, while wage inflation has held its slight upward trend. The effective minimum wage still continues move up, likely to be forced higher by restriction on immigration. Housing figures have continued to improve, with a slight dip in February driven mainly by lack of supply. The consumer sentiment measures continue to improve. While few dispute that this economic expansion is in its later stages, there is no evidence that a recession, or even a strong market correction looms. Instead, the underpinnings of another decent year economically are firmly in place. The caution here is remains the same as in past quarters, namely world events, domestic and international political disruption, higher than desirable inflation, trade wars, and other factors not yet in our line of sight.
Inflation – Good
The big news here is that there is inflation, albeit low vs historical levels. Inflation at 2% has been deemed by the Federal Reserve to be a target for a healthy level, and we have attained that. This allows wages to float up, prices to rise, and demand to drive the bus. However, in the spirit of always looking for potential potholes, the risk we see is in how it impacts the consumer who drives 2/3 of the economy. We want wages to rise, but if this rise is erased by rapidly increasing costs in housing, energy, borrowing, and more, then the spending power of the consumer is diminished and the economy stalls. We see no sign of this now, but will remain on the lookout should signs appear.
Interest Rates – Good
While we have been cautious if not fearful of rising rates, and their impact on the bond market, the consumer, corporate liquidity, and the national debt, we also know that the Federal Reserve must find a way to normalize rates. Otherwise, in the future when the economy inevitably cools off or stalls, the Fed will have no way to stimulate the economy by easing rates. In addition, normal interest rates help banks. If they can be nudged up, as we predict they will be over the next 18 months, then we can face the end of this bull market with the comfort to know that the Fed can help navigate through the normal peaks and troughs of economic cycles. Right now, the rates are still extremely accommodative. The signs that the Fed is ready to deliberately march upward with rates are encouraging, but there is still a long way to go. Spreads and conditions now favor high yield, convertibles, and other less mainstream fixed holdings.
U.S. Stock Market – Good with Caution
The first quarter of 2017 has given us healthy returns across the board. However, looking ahead, the investor should not expect 5% per quarter from the S&P 500 indefinitely. While the economy looks good, and shows no sign of slowing, the length of this bull run, and the valuations of the companies in the S&P cannot be denied. This is a time to be vigilant in maintaining your appropriate risk exposure.
U.S. Bonds: Neutral with Caution
We have heard loud and clear that interest rates will go up if they can. The trifecta of indicators, GDP, unemployment and inflation, are exactly where the Fed stated they wanted to see them in order to continue to push rates up. In addition, the Fed projects these indicators to remain in these ranges for years to come. So, unless we see disruptive crisis erupt just when the Fed is poised to make a change to rates, expect consistent commitment to rising rates. If the rate of rates changing accelerates, the bond markets could wobble. But, as it stands now, the moves have been so slow and small that markets have had time to adjust. Bond markets remain vulnerable, and values of pooled funds are still likely to move downward as rates move up. We remain cautious.
We are making no change to current allocations at this time. Recent changes have attempted to protect the fixed income portfolio, through diversification of asset type. In addition, the move in equity exposure to slightly favor more stock selection vs index investing has paid off in overall outperformance in both the AdviseMe portfolios, and the High Dividend ETF strategies.
Latest Updates & Information
The 3rd quarter continued the economic progress seen so far in 2018. This good progress was seen in the extension of a bull market through Q3.Read full story here
The 2nd quarter continued to roll out strong economic results in the U.S. Some of this good data buoyed the market slightly in Q2.Read full story here
Check out the Second Quarter Market Insights led by Beth Spurry, CFP, CTFA.Watch video here