Market Watch - April 2017
Written by Rick Welch on April 1, 2017
We are pleased to provide you with our quarterly newsletter featuring the status of our investment class weightings, our interpretation of recent data and our outlook for the future. If you have any questions about any topic, we hope you will not hesitate to contact us.
Status of our Investment Class Weightings
Changes from our January 2017 Market Watch are noted in italic.
US Large Cap Sectors –
Overweight – Financials and Technology
Neutral – Consumer Discretionary, Consumer Staples, Energy, Health Care, Industrial, Materials and Real Estate
Underweight – None
No Weighting - Utilities
US Mid and Small Cap – Maintain all weightings.
International Developed Markets – Maintain all weightings.
Emerging Markets – Maintain all weightings.
Alternative Strategies – Maintain all weightings.
Multi-sector Bond Funds – Maintain all weightings.
Investment Grade US Corporate Bonds – Maintain all weightings.
High Yield US Corporate Bonds – Maintain all weightings.
Investment Grade Municipal Bonds – Maintain all weightings.
Data – After rising in January and February, the markets struggled to find positive momentum in March. At one stretch the DJIA fell for 8 consecutive days, the benchmark’s longest losing streak since the summer of 2011. For 2017, we see the following equity benchmark returns: US Large Cap – DJIA (+4.55%) and S&P 500 (+5.53%), US Small Cap - Russell 2000 (+2.44%) and International - ACWX (+8.31%). On the earnings front, for Q1 2017 we see an estimated earnings growth rate of 9.1%, which if realized would mark the highest year-over-year earnings growth reported by the index since Q4 of 2011. Higher oil prices combined with favorable comparisons to lower 2016 figures should result in the much plagued energy sector making the largest contribution to earnings growth for the S&P 500. GDP, the broadest measure of economic output, for Q4 showed an annualized growth rate of a now on-trend 2.1%. Volatility (as measured by VIX) remained low in 2017 finishing Q1 at just 12.18, far below the long run average of 20.0 and lower than all but 3% of daily VIX readings throughout its 24-year history. Domestic economic data for Q1 was generally good. During Q1, the yield on the benchmark 10-year US Treasury was range bound starting the year at 2.44% and ending the period at 2.39%. Thus far in 2017, the Barclays US Aggregate Bond Index has risen +0.41%. Monthly job growth averaged 209,000 in December, January and February as the national unemployment rate remained at 4.7%. New weekly unemployment claims averaged a low 242,000 in Q1 (compared to 256,500 in Q4) providing a positive outlook for the domestic job picture. Consumer confidence, as measured by the Conference Board, rose to a 16-year high mark in March “as consumer’s assessment of current business and labor market conditions improved considerably expressing much greater optimism regarding the short-term outlook for business, jobs and personal income prospects.” The February Manufacturing Business Outlook Survey by the Federal Reserve Bank of Philadelphia showed that manufacturers had grown more optimistic about growth over the next 6-months as the six-month index rose to its highest reading since early 1984. Retail sales data was ok in December (+1.0%), January (+0.6%) and February (+0.1%). The housing sector faced a difficult winter quarter with mixed results in new home sales and housing starts for January (+5.3% and -1.9%) and February (+6.1% and +3.0%). CPI rose 0.1% in February and over the last 12 months the all items index increased 2.7%, a level above the Fed target of 2.0%.
Outlook – The first 100 days of the Trump administration will be remembered as busy, interesting, contentious and at times, colorful. The desire of President Donald Trump to live up to his campaign themes of pro-growth, pro-business and America-first has fueled investor optimism here in the US and has been largely supportive of share price growth in 2017. The big question now for investors is how long will it take to see concrete policy action to support the political rhetoric? On March 24th the new administration saw its own health care bill ( the American Health Care Act) unwind after failing to gain the support of conservative republicans. In the days leading up to an anticipated vote we saw deal making done in true President-led form which suggests that we are not only witnessing a shift in government policy, but also a shift in how government policy is pursued. GOP leaders and the President must now decide if they can rely on the Republican Freedom Caucus moving forward or if they should focus more on gaining the support of centrist Democrats, whom they have largely ignored to this point. The promises of tax reform and infrastructure spending can be very good for the financial markets. However, failed promises could ignite a summer sell off later this year. History suggests that when it comes to tax reform (in this case the main focus would be on corporate tax reform), what is ultimately legislated can vastly differ from what was originally proposed. Setting aside the issue of lost tax revenues for a moment, we must note that with a marginal corporate tax rate of 39% the US is among the highest of all global industrial countries. A reduction in the base rate to 20% or 25% would very supportive of corporate bottom lines and, in turn, share price growth going forward.
“I hereby notify the European Council of the United Kingdom’s intention to withdraw.” With those words Prime Minister Theresa May on March 29th invoked Article 50 of the Lisbon Treaty, which defines the process for a member country to leave the EU. This action sets in motion a two-year period for negotiations to take place, after which the UK would cease to be a member of the EU. As provided for in Article 218 of the Treaty, the EU must now negotiate and enter into an agreement with the UK, which agreement shall set forth the arrangements for its withdrawal and take into account the framework for its future relationship with the Union. The terms of the agreement will be negotiated between the 27 remaining members of the EU, each of which shall have veto power, and be subject to ratification in national parliaments. The impact of BEXIT could be far reaching and cover many issues, including trade policy, foreign direct investment, government regulation, industrial policy, immigration, budget and international influence. Existing trade relationships between the UK and EU members (there are over 50 free trade deals between the parties) will have to be renegotiated and some estimates suggest that these negotiations alone could last for years.
