Global Markets: Optimistic
In Q2 we predicted that developed international markets were shaping up to be leading the way for performance in 2017. Although the NASDAQ topped the charts at 14.71% YTD, International has already posted a 13.81% YTD return. The fundamentals in Europe especially are continuing to strengthen with lower and lower unemployment, slight tightening of credit markets, and every day moving a little farther away from political destabilization. In emerging markets, there continues to be a tug of war between low oil prices, and demand for other raw materials, along with the constant headwind of political change. Nonetheless, this has proved to be a good year, so far, for exposure to world markets. With P/E’s in the ACWI excluding the US slightly below average, we continue to like exposure in this area.
U.S. Economy – Good
The key factors we track, unemployment, housing, and inflation, are still healthy. There has been little change to inflation, which stays solidly below 2%, but remains in a safe zone. Unemployment is still tracking historical lows, but wage inflation is somehow still not a major problem for U.S. Corporations. Housing starts and sales are ever improving. Interest rates, while trending up, are projected to increase in an orderly way. The economy is good, and absent some external force like war, natural disaster, or rapidly deteriorating fundamentals we can’t foresee, should continue to be good for some time.
Inflation – Good
We have inflation hovering around 1.7%, a pace that is significantly outpaced by investment returns, home appreciation, and in many pockets of the U.S. is outpaced by wage growth. The real spending power of many Americans has improved, which is a good thing for the economy and the markets.
Interest Rates – Good with caution
The Fed continues to be extremely cautious, but absolutely committed to raising rates slowly over time. The two rate increases this year may be met with a third. However it remains clear that Chair Yellen intends to march toward normalization, even if it takes a couple of years to get there. This should be good news for bond markets which will have time to adjust and react to these small changes. We remain slightly cautious with bond investments.
U.S. Stock Market – Good with Caution
After the tremendous returns of 2016, 2017 has delivered great returns so far, yet again. However there is no reason to expect another 6 months like the last. While economic fundamentals remain strong, the sheer length of this expansion and bull market demands caution. Therefore close attention should be paid to rebalancing portfolios to maintain the proper exposure to equities.
We have made some recent allocation changes, increasing international exposure across the board. In addition, the allocation to growth and value in large cap US Equities has been more equalized to reflect a somewhat more conservative stance. Overall however, we remain optimistic about what the markets can produce in the near to intermediate term.