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Napa Valley Wealth Management - St. Helena, CA
Market & Economic Commentary | July 2017

Market & Economic Commentary | July 2017

| July 20, 2017
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Market Commentary, July 2017

Overall, 2017's second quarter delivered excellent results. With the exception of natural resources and REITs, all asset-class gains were in line or exceeded expectations. Stock prices and bond markets should continue throughout 2017, supported by positive economic activity at home.

2Q DRIVING FACTORS

Interest Rates

The Federal Reserve Bank raised key interest rates by 0.25%1in June, the third rate increase since December. This move was widely expected and follows the last uptick in March of 2017. World interest rates also inched up, as key European banks raised rates in tandem with the U.S. increase. Future increases are likely. With recent inflation muted, the Fed should have room to raise rates more slowly, which will be beneficial for the economy.

Oil

Oil prices retracted sharply during the last quarter, plummeting to roughly $44 per barrel. We predicted that oil prices would remain volatile, while they are near the bottom of the trading range. Oil has not yet adjusted to a price tied to true worldwide supply and demand.

U.S. Growth           

Economic news remains upbeat, with U.S. economic growth positive, in tandem with stock prices. Unemployment news remains varied. While the latest job-growth stats exceeded 220,000 new jobs, unemployment ticked up slightly from the recent low. As well, many economists believe that a significant chunk of the job force is still underemployed (looking for full-time work while holding one or two part-time jobs).

EFFECTS ON ASSET CLASSES

Equities

Global stock markets moved sharply higher during the second quarter of the year. U.S. stocks remain at record-high levels, responding favorably to recent economic news and corporate earnings reports. Large-cap fund returns were mixed: growth funds were up 5.45% and value funds 1.9%. Mid-cap funds were similar, with growth at 4.8% and value gaining an average 1.01%. Small-cap funds gained 4.58% for growth and 0.46% for value. These numbers show that bank stocks receded slightly, while technology stocks advanced more sharply.

Foreign stock performance was excellent for the second quarter in a row, indicating a strength in global-equity markets we have not seen in the last eight years. While Latin America lagged emerging markets, due to continued instability in Brazil and Venezuela, both Europe and Asia performed well in the emerging-market sectors. Core international funds were up for 6.15%, with emerging markets showing gains of 5.79%.

Natural resources performed poorly, due to the decline in oil prices, and were down 11.04%. REITs continued to show strength after falling sharply at the end of 2016. Current quarter results were 1.85%. Precious metals also rallied with gains of 3.56%.

Bonds

The bond markets showed decent returns, even in the face of interest-rate increases. Mid-long positions returned 1.43%; short-term bonds 0.66%; foreign bonds 1.79%; and municipal bonds continue their rebound at 1.89%. High-yield performed very well, yielding 2.3%. The bond market can actually continue to benefit investors, even with rates rising.

LOOKING FORWARD

Economy: Positive economic news continues to paint a backdrop for expected growth in U.S. stocks. We believe domestic economic strength will likely continue through 2017, potentially into 2018. Labor statistics and corporate earnings remain strong and are key indicators that this expansion has not yet reached its endpoint. Strength in global economies could also help provide opportunities for U.S. exports, which have been weak in the recent years.

Equities: With equity returns outpacing bond returns and with momentum still strong in U.S. equity markets, we continue to retain full allocations in our stock positions. Due to relatively high prices, U.S. equities may be close to an inflection point, where they will underperform their foreign peers. It's important now to pay attention to core foreign equities and emerging markets.

Bonds: After a decade with only one uptick, interest-rate increases now dominate the headlines. We’re watching the pace of increases and the effect on the economy closely. Rising rates will add costs to business and create a drag on consumer spending.

Global banks have followed the Federal Reserve’s lead and taken their first substantial rate increase. Bond prices have remained strong even with global rates rising. This is in part due to the continued demand for bonds, which are excellent income-producing investments, and many investors, especially retirees, need income to support their living expenses. Additionally, strength in the bond market is likely tied to an expectation that the Fed will moderate subsequent rate hikes, only continuing them if the economy can support the higher costs associated with rising rates.

On the flipside, that Fed will need to begin selling assets, including the bonds they purchased during the recent recession, to help us avoid a more severe economic collapse like the great depression. These Fed sales would potentially drive bond prices down, resulting in rates increasing more sharply than when adjusted directly by the Fed. Any sale of Fed assets would be absorbed more easily in a strong economic environment. Inflation and economic growth would be key factors in deciding how fast to sell assets and how quickly to raise key interest rates. 

We publish these insights quarterly for our clients, with further detail on specific asset classes. Our personalized investment management strategy is built around each client’s personal Financial Plan and Investment Policy Statement. We review both as we make changes to each client’s portfolio, working to ensure their investments match their personal risk tolerance, return goals, and tax picture.

We welcome the opportunity to talk about how we might help you plan, build, preserve your wealth.

From left, our Investment Committee members include:

Earl Knecht, CFP®, Portfolio Manager
Kelly Crane, CFP®, CFA, CLU, Chief Investment Officer
Robert Lance, Director of Operations

                                                                          


1 The Federal Reserve raised key interest rates by 0.25%. Reported on http://money.cnn.com/2017/06/14/news/economy/federal-reserve-june-meeting/index.html.

2 All asset-class quarterly data pulled from Barron's Lipper Quarterly Performance Report, dated 7/5/17.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

Investing in Real Estate Investment Trusts (REITs) involves special risks such as potential illiquidity and may not be suitable for all investors. There is no assurance that the investment objectives of this program will be attained. Bonds are subject to market and interest rate risk if sold prior to maturity.

Bond values will decline as interest rates rise and bonds are subject to availability and change in price. An increase in interest rates may cause the price of bonds and bond mutual funds to decline.

Stock investing involves risk including loss of principal.

 

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