The first nine months of the year were characterized by strong market returns, low volatility and moderate economic growth. For the third quarter of 2017, the S&P 500 returned 4.48% and the FTSE All World Ex-US Index increased 6.02%. For the year ending September 30, the S&P 500 added 14.24% and the FTSE All World Ex-Us Index was up 20.93%. In the third quarter, investors watched Hurricanes Harvey, Irma and Maria ravage parts of the U.S., and in the remaining months of 2017they will be watching future interest rate hikes by the Fed, valuations, and the Trump administration’s next move on taxes and healthcare.
Capital Markets Review
January 1, 2017 – September 30, 2017 index returns :
S&P 500 (U.S. Large Cap): 14.2%
Russell 2000 (U.S. Small Cap): 10.9%
MSCI EAFE (Developed International Markets): 20.9%
MSCI EME (Emerging Markets): 28.1%
Barclays Capital Aggregate (U.S. Fixed Income): 3.1%
Barclays Global High Yield Index: 9.5%
Bloomberg Commodity Index: -2.9%
The U.S. economy has been steadily growing for 8 years, and we are in the 9th year of economic expansion. Real gross domestic product (GDP) increased at an annual rate of 3.1% in the second quarter according to the third estimate released by the Bureau of Economic Analysis. The unemployment rate declined to 4.2% in September, and total nonfarm payroll employment decreased by 33,000 jobs, according to the U.S. Bureau of Labor Statistics. The disappointing decrease in jobs numbers can be attributed to Hurricanes Irma and Harvey, however, the unemployment rate is the lowest it has been in 16 years. The ISM manufacturing index rose to 60.8 in September, from 58.8, illustrating that a weak dollar and global demand has benefitted manufacturing.
Inflation has been steadily declining over the years, but will probably increase shortly to the Fed’s 2% target. Oil prices and the U.S. dollar are two things that could move inflation up. Year to date, the dollar is down about 9%, as this pushes down imports and pushes up oil prices. Interestingly, high yield bonds have had a major move up and are starting to look expensive. In fact, our multisector bond manager, PIMCO, has been moving up in quality. Yields on U.S. 10-year Treasuries are around 2.2%, which are close to fair value estimates.
The Federal Reserve is looking to reduce the federal balance sheet by not reinvesting maturing securities and slowly reducing the buildup of over $4 Trillion in bonds from the quantitative easing program. In addition, if the environment is favorable, they will likely raise rates in December and a few more times in 2018. There is a possibility that there may be a new Fed chair to replace Janet Yellen – if there is new leadership, policies will likely be the same or more aggressive.
As mentioned in prior communications, Congress and President Trump have a long list of proposed items to implement which could affect the U.S. economy; topics include reducing personal and corporate tax cuts, restricting immigration, increased spending on defense and infrastructure, and repeal and replace the affordable care act.
Globally, growth is strong. In the BRIC countries (Brazil, Russia, India, China) inflation is low and healthy, and in developed countries, inflation is picking up. In the eurozone, GDP growth and earnings are strong. Strong economic growth against a backdrop of low inflation pushed the euro higher, while a spell of weak inflation simultaneously pushed the U.S. dollar down. Going forward, investors will be watching policy from the European Central Bank (ECB) and political ramifications in Italy. It is important to note that from Macron’s victory over Le Pen in France, euroskepticism is toned down, at least in the short term. As mentioned in prior communications, we increased international exposure in 2015, and our portfolios have benefited because of that.
Developed countries in the Asia Pacific region like Australia and Japan have seen improvement in growth. The momentum in global demand has continued, which has flowed through to robust global trade, benefiting exporters in the region, although tensions around North Korea remain. In China, we think growth may slow, but not to the point of a sharp downturn, and the renminbi may appreciate against the dollar in the next few years . There is room for growth in the developing Asia Pacific markets.
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
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 diversified commodity 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.
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.