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

Market & Economic Commentary | October 2017

| October 11, 2017
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Third quarter 2017 again delivered excellent portfolio results. The U.S. economy continues its steady, robust course while political and economic risks in Europe wane. Global stock prices and bond markets remain positive—even in the face of natural disasters and geopolitical concerns. Below is our assessment of the main factors affecting the markets.

DRIVING FACTORS           

Oil

Oil prices remain volatile, and we’ll need stable growth overseas before we see a correct market price. Supply is up and demand is down, creating a fragile market.

Interest Rates

The Federal Reserve Bank is widely expected to increase key interest rates during their December 2017 meeting. The probability of an uptick rose when unemployment declined to 4.2%, indicating continued strength in the labor markets. The Fed also announced plans to slowly sell off bond assets it purchased during the Quantitative Easing periods of the recent recession. Starting this month (October), the Fed will cease reinvesting interest on these assets and, in the coming months, will gradually sell bonds to reduce its balance sheet. This sell-off will create some pressure on prices and may lead to rate increases in the bond markets.

U.S. Growth           

Growth in the U.S. economy translates into higher corporate earnings and stock prices. While the number of new jobs recently created lags previous periods, the fact remains we have restored almost double the jobs lost during the recession. Low unemployment and some inflation signals are likely to support the Fed’s decision to raise rates. If done gradually, rate hikes can be absorbed in the growing economy and not create a downdraft that could lead to another recession.

EFFECTS ON ASSET CLASSES

Equities

Global stock markets pushed higher for the second straight quarter, and U.S. stocks set new record-highs as earnings remained positive and the economy strong. Large-cap fund returns were excellent, with growth up 5.49%1and value 3.72%. Mid-cap stocks were similar, with growth at 4.31% and value gaining an average 3.66%. Small-cap funds gained 5.51% for growth and 4.69% for value. 

Technology stocks outpaced financials, while foreign stock performance was outstanding for the third quarter in a row. Strength in emerging markets was notable, with Latin America advancing by 15.3% and China moving higher by 10.42% Both Europe and Asia performed well in general, with core international funds up 5.62% and emerging markets showing gains of 7.42%. Natural resources rebounded with an increase of 6.60%. REITs (up 0.68% for the quarter) lagged again with interest-rate fears looming over the real estate market. Precious metals edged slightly higher with gains of 1.67%.

Bonds

The bond markets continue to demonstrate remarkable strength in light of the Fed’s plan to tighten policy. Slow moves by the Fed should help price stability in the bond markets.

Here are the returns for the third quarter: Mid-long positions were mixed, with losses in mortgage-backed and gains in corporate positions; short-term bonds 0.68%; foreign bonds 1.60%; and high-yield municipal bonds moving higher at 2.85%. High yield continued to rally, with returns of 1.90%. Preferred stocks were excellent, with gains of 1.70% for the quarter.

Regular interest and stable returns are potential benefits of bond investments. These traits are particularly notable during periods when stock prices continue to move higher in an unabated fashion. Diversification always matters.

LOOKING FORWARD

Economy: Key indicators point to continued expansion in our economy, and we expect growth to continue in the short term—though numbers may be a little skewed from rebuilding after the hurricanes. Disaster rebuilding usually redirects economic resources and, typically, does not offer long-term growth potential.

Equities: U.S. prices are relatively high, with forward P/E ratios of the S&P500 higher than global equities outside the U.S.2 Additionally, total market returns since the last market bottom (March 2009) point to U.S. outpacing internationals: U.S. index 272% and foreign 117%. Apparently, there is room for growth in international stocks and the flow of funds may be moving in that direction, which will create additional tailwinds. Care must be taken to maintain the correct allocation and target risk levels.

Market Returns US Foreign October 2017

Bonds: The focus on rising rates continues. We believe constant, slow action by the Fed will continue as they rein in the bonds purchased during the stimulus. Banks are healthy, and growth and employment are steady—these should further encourage the Fed. Higher-yielding bonds will continue to perform well and should be maintained until the economic expansion slows or interest rates start rising sharply. Any short-term pullback in stocks will likely increase bond demand and help keep fixed-income prices up.

At September’s end, over $2.5 trillion in cash was parked inside investment accounts. That money is idle and may not be deployed until the next investment cycle. Keeping tabs on this money is vital, as any significant movement of cash tends to drive prices and can make market movements more severe at times. We will monitor the flow of funds to identify any trends in the movement of cash or net flows to stock or bonds.

* * *

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  All asset-class quarterly data pulled from Barron's Lipper Quarterly Performance Report, dated 10/3/17.

2 On September 30, 2017, the S&P 500 P/E forward ratio was 17.7 versus 14.2 for the MSCI All-World ex-US index.Source: J.P. Morgan “Guide to the Markets”, as of September 30, 2017.

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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