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Quarterly Commentary – June 2017

The U.S. Equity markets managed to continue moving up during the second quarter of 2017. Despite a couple of spikes in volatility it managed to settle down toward the end of the quarter. The following are performance numbers from various popular indexes for the quarter. Index numbers are not individually comparable to a properly diversified portfolio. Each portfolio may include an allocation to securities similar to these indexes in varying amounts based on your personal risk tolerance and should only be compared in that context. The S&P 500 was up 9.3% for 2017. The Dow Jones Industrial Average was up 9.3%. The Nasdaq Composite Index was up 14.0%. The Russell 2000 Index was up 4.9%. International equities as represented by the MSCI World Ex U.S. Index were up 12.8%. Fixed Income as represented by the Barclays Aggregate Bond Index ended up 2.3% for the year.

Looking at market technicals, what jumps out is the narrow breadth of the rally these past few months. The advance has largely been fueled by a handful of well known, mega-capitalization technology companies. Half of this year’s gain in the S&P 500 for example came from 20 or so companies, that is only 4% of the stocks in the index. Also, the disparity of returns among various areas of the markets were notable. Despite a good showing for the S&P 500 Index, it was not indicative of the full picture of the U.S. Equity market where growth outpaced value type stocks year to date by a significant margin. That is a reversal of what happened last year where value oriented stocks did much better than growth, even among large capitalization securities such as the S&P 500. Large companies also outpaced their smaller counterparts which had fared nicely after the election but fizzled out. It is typical for money to abruptly flow in and out of certain areas based on how things have done in a given area and in the short term it may do so arbitrarily, typically taking advantage of profit taking to invest in beaten down areas. Outperformance in one area can at some point lead to underperformance and vice versa. This is why maintaining a proper exposure among many of the important factors and exposures makes sense over time. In the short term it certainly can help to dampen volatility. International exposure continued to pay off in the portfolios and both developed as well as emerging markets had returns year to date that outperformed the U.S. Markets by a nice margin. Fixed income produced a very small gain as this allocation’s fit into a portfolio in the current environment is more about creating a buffer to soften portfolio volatility as interest rates normalize back to higher levels.

It seems the narrative has changed a bit from economic expansion and low market volatility to possibly a frothy market led by fewer stocks and a flattening yield curve which suggests that both the economy and inflation are slowing down. There were sharp declines in housing and construction spending. consumption as evidenced by retail sales have softened. The manufacturing and service sectors continued to expand. Consumer confidence remains robust and the employment picture continues to improve. Initiatives that were to come out of Washington to jump-start consumption and investment have been mired in politics and hopes for a stimulative policy mix from Washington have come down a notch. The Federal Reserve hiked rates by 0.25% in June along with the tapering of the Federal Reserve’s balance sheet. This represented a more hawkish stance given that this happenened while there were indications of softening worldwide and the bond markets are telling a story of lower growth and lower inflation ahead. Overseas, China is tightening after years of stimulus that succeeded. We are seeing a slowdown in Chinese activity which will have repurcussions for global manufacturing and commodity prices. Europe is more vulnerable from the China impact. Economic conditions in the Eurozone have not been ideal however they are looking better than they have in quite some time. After enduring a significant recession, concerns over government debt, structural limitations and an existential threat from populism the Eurozone has found renewed optimism.

The U.S. equity market seems to have been able to tune out the noise from Wachington. The outcome of policies however can change the landscape very quickly, particularly if optimism from a tax cut, infrastructure spending and a continued reduction in regulations become unlikely to materialize.

We hope you are enjoying the summer and we thank you for the opportunity to be of service.