April 2017 Market Update

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April 2017 Market Update

The first three months of 2017 were characterized by high consumer confidence, a stream of good economic news, low volatility and strong market returns as investors followed the Trump administration’s rise to power. For the first quarter of 2017, the S&P 500 returned 6.07% and the FTSE All World Ex-US Index increased 7.92%.

Though consumer and business confidence is high, there is a lack of balance in the hard data to support this rise in confidence. The economy is roughly the same as it was before the election, though we believe there are opportunities in a well-diversified portfolio. In the short term and for the rest of 2017, investors will be watching earnings, future interest rate hikes by the Fed, and Trump’s proposed policy changes.

Capital Markets Review

January 1, 2017 – March 31, 2017 index returns

[1]:

 

S&P 500 (U.S. Large Cap): 6.1%

Russell 2000 (U.S. Small Cap): 2.5%

MSCI EAFE (Developed International Markets): 7.4%

MSCI EME (Emerging Markets): 11.5%

Barclays Capital Aggregate (U.S. Fixed Income): 0.8%

Barclays Global High Yield Index: 3.2%

Bloomberg Commodity Index: -2.3%

Trumponomics

As mentioned in prior communications, Congress and Trump have a long list of proposed items to implement which could affect the U.S. economy and investors; topics include reducing personal and corporate tax cuts, restricting immigration, increased spending on defense and infrastructure, and repeal and replace the affordable care act.

We believe that policies will continue to move forward with immigration and trade. It is important to remember that if there is a decrease in legal immigration, things like GDP growth, jobs and the labor market will suffer. As the baby boomers enter retirement, there will be a larger dependence on immigrants to fill vacant jobs.

It will be difficult to pass legislation that cuts federal revenues by cutting taxes. Deficits are currently at 3.2% of GDP, and expected to grow under current legislation. A large cut in taxes coupled with increased infrastructure and defense spending would likely result in deficit increased that may not make it through congress.

In terms of the affordable care act, it’s hard to please both sides of the aisle and make everyone happy. There will likely be more attempts to get the plan revised and approved. Importantly, Trump had a 39% approval rating at the end of March during his first 100 days per a Gallop poll, compared to 54% approval rating for Bush and 61% approval rating for Obama. We see this as a challenge as it is important to have popular approval, especially when trying to pass legislation.

U.S. Economy

U.S. economic indicators remain solid, indicating slow but stable growth. Consumer sentiment and confidence is high. In April, the headline consumer sentiment index rose to 98 from 96.9. Real GDP increased at an annual rate of 2.1% in the fourth quarter of 2016, according to the Bureau of Economic Analysis. Total non-farm payroll employment increased by 98,000 in March, and the unemployment rate declined to 4.5%. The report was well under the expected 180,000 jobs but largely due to weather related factors. The rebound in oil prices, continued recovery in the housing market, and a big turnaround in business investment could mean that there will be an increase in private investment spending[2].

Corporate profits remain strong and should grow slowly in 2017. A rise in the U.S. dollar could put a drag on profits, but an improvement in the energy sector would more than offset this. We believe that due to this solid economic data and the increased prospects of inflation, the Fed will raise rates two to three more times in 2017.

It is possible that this will create a less friendly environment for U.S. government bonds and put upward pressure on the U.S. dollar. U.S. 10-year Treasury yields rose to 2.5% as of mid-March, which is close to fair value. The U.S. dollar is already priced high and we believe it has some further upside potential, but this is limited by the relationship between the dollar and Fed tightening. More dollar strength will create a headwind and in our view make the Fed less aggressive, which could put downward pressure on the dollar[3].

Global Economy

Manufacturing globally is strong. The Eurozone is in improving shape fundamentally with lower unemployment and rebounding financial markets. As we have seen over the past few months, portfolios with an international tilt have done quite well and we expect this to continue.

In the emerging markets, it is possible that some of Trump’s proposed policies could weigh negatively. President Trump has supported greater restrictions on international trade, which, if implemented, are likely to be a headwind for emerging market economies. In the Asia-Pacific region, there are concerns over high levels of debt and threats of protectionism. In China, growth numbers are positive, but it will be a challenge to manage high levels of debt in a higher rate environment. However, we still view the emerging markets as an area of opportunity due to relatively low valuations.

Investment Thinking

Have you ever ridden a bike with worn-out shock absorbers? Every bump is jarring and an excuse to hop off and walk instead. Owning an undiversified portfolio can trigger similar reactions. You can ride a bike with a broken suspension system, but it will be an extremely uncomfortable ride and the bike will be much harder to control, particularly in difficult conditions. Throw in the risk of an accident or running off the road altogether, and there’s a real chance you may not reach your destination.

In the world of investment, a similarly bumpy and unpredictable ride can await those with concentrated and undiversified portfolios or those who constantly tinker with their allocation. Everyone feels in control when the surface is straight and smooth, but it’s harder to stay on the road during sudden turns and ups and downs in the market. For that reason, the smart thing to do is to diversify, spreading your portfolio across different securities, sectors, and countries. That also means identifying the right mix of investments (e.g., stocks, bonds, real estate) that aligns with your risk tolerance. Using this approach, your returns from year to year may not match the top performing portfolio, but neither are they likely to match the worst. More importantly, this is a ride you are likelier to stick with.

We continue to monitor the global economy and seek opportunities to invest in certain sectors and geographic regions given the current market environment. In our view, a long-term investment horizon, asset allocation, diversification and discipline remain crucial to portfolio success. If you are a client and would like further detail on these topics or anything else, please call or email us. If you are not a client, but would like more information on Callan Capital’s wealth management services, please contact us at (858) 551-3800 or www.callancapital.com.

 

Important Index Descriptions and Disclaimers

PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS

INDEX DESCRIPTIONS:

The following descriptions, while believed to be accurate, are in some cases abbreviated versions of more detailed or comprehensive definitions available from the sponsors or originators of the respective indices. Anyone interested in such further details is free to consult each such sponsor’s or originator’s website.

The past performance of an index is not a guarantee of future results. Each index reflects an unmanaged universe of securities without any deduction for advisory fees or other expenses that would reduce actual returns, as well as the reinvestment of all income and dividends. An actual investment in the securities included in the index would require an investor to incur transaction costs, which would lower the performance results. Indices are not actively managed and investors cannot invest directly in the indices.

S&P 500®: Standard & Poor’s (S&P) 500® Index. The S&P 500® Index is an unmanaged, capitalization – weighted index designed to measure the performance of the broad US economy through changes in the aggregate market value of 500 stocks representing all major industries.

Russell 2000 Index: An index measuring the performance approximately 2,000 small-cap companies in the Russell 3000 Index, which is made up of 3,000 of the biggest U.S. stocks. The Russell 2000 serves as a benchmark for small-cap stocks in the United States.

EAFE Index: An index created by Morgan Stanley Capital International (MSCI) that serves as a benchmark of the performance in international index has been in existence for more than 30 years.

EME Index: An index created by Morgan Stanley Capital International (MSCI) that serves as a benchmark of the performance in global emerging markets. It is a float-adjusted market capitalization index that consists of indices in 21 emerging economies.

Barclays Capital Aggregate Bond Index: An index maintained by Barclays Capital, which took over the index business of the now defunct Lehman Brothers, and is often used to represent investment grade bonds being traded in United States. It is an unmanaged index considered representative of fixed-rate, noninvestment-grade debt of companies in the US, developed markets and emerging markets.

Barclays Global High Yield Index: An index maintained by Barclays Capital.

Bloomberg Commodity Index: A broadly diversifiedcommodity price index distributed by Bloomberg Indexes.  It tracks prices of futures contracts on physical commodities on the commodity markets. The index is designed to minimize concentration in any one commodity or sector. It currently has 22 commodity futures in seven sectors.

DISCLAIMERS:

Nothing contained herein is intended constitutes accounting, legal, tax advice or investment recommendations, or the recommendation of or an offer to sell, or the solicitation of an offer to buy or invest in any investment product, vehicle, service or instrument.  Callan Capital does not provide individual tax or legal advice. Clients should review planned financial transactions and wealth transfer strategies with their own tax and legal advisors. For more information, please refer to our most recent Form ADV Part 2A which may be found at adviserinfo.sec.gov.

Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without previous notice. All information presented herein is considered to be accurate at the time of writing, but no warranty of accuracy is given and no liability in respect to any error or omission is accepted.  This information should not be relied upon by you in evaluating the merits of investing in any securities or products mentioned herein.  In addition the Investor should make an independent assessment of the legal, regulatory, tax, credit and accounting and determine, together with their own professional advisers, if any of the investments mentioned herein are suitable to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. It should be noted that the value of investments and the income from them may fluctuate in accordance with market conditions and taxation and investors may not get back the full amount invested. Both past performance and yield may not be a reliable guide to future performance. The information presented herein is for the strict use of the recipient and it is not for dissemination to any other third parties without the explicit consent of Callan Capital LLC.

[1] JP Morgan, Guide to the Markets, April 2017, www.jpmorgan.com

[2] Ashworth, Paul. Capital Economics Weekly, April 13, 2017. https://research.cdn.capitaleconomics.com/df98d2/investment-growth-to-pick-up-this-year.pdf

[3] 2017 Global Market Outlook, January 2017, Russel Investments www.russellinvestments.com

By | 2017-06-02T17:58:52+00:00 April 18th, 2017|Market Update|

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