Market Watch (January 2018)

                 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 October 2017 Market Watch are noted in italic.

US Large Cap Sectors –

                Overweight – Financials, Health Care and Technology

                Neutral – Consumer Discretionary, Energy (↑), Industrial and Materials

                Underweight – Consumer Staples (↓)  

                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.

We will continue to target an average fixed income portfolio duration in the short-to-intermediate term, or about 3 to 7 years.

Multi-sector Bond Funds – Maintain all weightings.

Investment Grade US Corporate Bonds – Maintain all weightings.

Investment Grade Global Corporate Bonds – Maintain all weightings

High Yield US Corporate Bonds – Maintain all weightings.

Investment Grade Municipal Bonds – Maintain all weightings.

Data – During Q4, the equity markets continued their climb to record highs.  For 2017, we see the following equity benchmark returns:  US Large Cap – DJIA (+25.08%) and S&P 500 (+19.41%), US Small Cap - Russell 2000 (+13.36%) and International - ACWX (+24.03%). On the earnings front, for Q4 we see an estimated earnings growth rate of 10.6% (revised downward from 11.3% on September 30), with Telecommunications, Consumer Discretionary and Industrial projected to report the lowest earnings growth for the quarter. GDP, the broadest measure of economic output, for Q3 showed an annualized growth rate of a strong +3.2%, the second consecutive quarter above +3.0%.  Volatility (as measured by VIX) remained low finishing Q4 at just 10.45, far below the long run average of 20.0. Domestic economic data for Q4 was generally positive. During the quarter, the yield on the benchmark 10-year US Treasury was again range bound ending at 2.40%. During 2017, the Barclays US Aggregate Bond Index rose +1.17%.  Monthly job growth averaged 169,000 in September (hurricane impact), October and November as the national unemployment rate fell to 4.1%.  New weekly unemployment claims averaged 238,692 in Q4 (compared to 251,615 in Q3) providing a positive outlook for the domestic job picture. Job growth and unemployment data continue to suggest that the US economy may very well be at or near a theoretical level of full employment. Consumer confidence, as measured by the Conference Board, increased during Q4 to a level not seen since 2002.

Outlook –  In 2017, investors benefitted from a rebound in corporate profits (both here and abroad), synchronized global economic growth not seen since 2007, low market volatility and still accommodative monetary policies from central banks around the world.  We believe that each of the aforementioned will likely be drivers of stock price growth in 2018. While we are mindful of the potential for downside volatility, we expect the now 10-year old bull market to continue albeit with lower overall return targets.  These are our key investment themes for 2018.

1. US economic growth has gained momentum with consecutive quarters of 3%+ growth and current Q4 estimates show a growth rate of 3.2%.  The employment picture is a healthy one with weekly unemployment claims at record lows, unemployment at 4.1% (the lowest level since 2000) and job growth averaging a solid 180K per month. Business and consumer confidence are surging, in fact, according to a November Conference Board survey consumer confidence is at a high mark not seen since 2002. Corporate earnings growth should continue with the current 2018 S&P 500 consensus earnings forecast coming in at 11%. We will continue to overweight sectors like Financials, Health Care and Technology, each of which have supportive relative valuations and strong growth prospects going forward. We will maintain a neutral view and weighting on Consumer Discretionary, Energy, Industrial and Materials. The Consumer Staples sector may continue to struggle in the face of rising interest rates, shifting consumer spending, eroding brand loyalty and Amazon.  Potential external obstacles include a failure of the Trump legislative agenda, adverse findings by the Mueller investigation and increased geopolitical tensions abroad.
2. At its December meeting, the Federal Reserve raised its benchmark interest rate by 0.25% to arange of 1.25 to 1.5%.   This hike, which was widely expected, was the fifth such increase since the bank cut its rate to nearly zero during the 2008 financial crisis. The Fed remains on track to continue with gradual interest rate hikes (three hikes of 0.25% in 2018, followed by two each in 2019 and 2020) and the process of balance sheet tapering begun in September. We will renew our view that the dual strategy of interest rate normalization and balance sheet reduction will be a difficult one for the Fed to execute and the potential for policy misstep is a risk to US stock price growth as we move into 2018.  The appointment of Jerome Powell as Fed Chairman suggests that the near future will likely not include any major policy shifts, but rather the status quo. We expect that fixed income yields likely will rise, though slowly, and in line with economic growth. The combination of short term rate hikes and subdued inflation may result in further flattening of the yield curve, when the spread (or difference) between short and long-term rates narrows. 
3. Global investment opportunities will continue to be supported by accelerating economic growth, strong earnings growth and accommodative monetary policy. For the first time in a decade, the 45 largest developed economies all reported economic growth in 2017. We expect this pattern to continue in 2018. Macroeconomic volatility should remain low as global growth likely continues to be broad based and steadily above historic trend. The Eurozone, in particular, has benefitted from the recovery in global trade and Asian economic growth, which suggests that the global economy is finally in a period of synchronized expansion.  This cyclical upswing is in contrast to what we see for the US economy, itself in a more mature or late stage of the business cycle. As global stock market correlations (how prices of two investments move in relation to each other) have fallen to record lows, the case for global diversification within an investment portfolio of risky assets, like stocks, has strengthened.