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ECONOMIC FLASH – Emerging Markets Come Roaring Back

November 2017

US Economy: 3rd quarter GDP at 3%.

For the second quarter in a row, the US economy grew by at least 3% rate vs. the 2.5% avg. since the 2008 financial crisis, with strong consumer and business spending. US unemployment claims fell to lowest level in 44 years.

US Stocks: Small-cap equities fade.

Signaling uncertainty about corporate tax cuts, small-cap equities significantly trailed larger stocks, on reports that lower tax rates might be phased in over a period of years.

Foreign Stocks: EM charge back.

Despite a stronger US dollar, emerging markets posted their best monthly return since May, with tech in the lead: Samsung rose over 7% on record earnings.

Fixed Income: Yields on upward path.

Rising interest rates were a headwind for most US fixed income securities, with yields rising most on shorter-maturity debt, on expectations of a Fed rate increase this Dec.

Non-Traditional: Managed futures rebound.

Managed futures funds recently benefited from long-equity position, bringing returns closer to positive for year-to-date 2017.

THE TAKEAWAY

Jerome Powell will be appointed as Chair of the Federal Reserve, replacing Janet Yellen whose term ends Feb. 2018. A current Fed governor, Powell is likely to continue the approach set under Yellen: methodically increasing the Fed funds target rate and trimming the Fed balance sheet. We continue to recommend allocations to flexible managers capable of navigating a rising rate environment.

In equities, we think corporate earnings are key to valuations. In the US, about 75% of the S&P 500 companies have beaten earnings expectations for 3rd quarter 2017 (with about half still to report), which creates support for equity prices. Nevertheless, we continue to evaluate whether our portfolios may benefit from more defensive positioning, given higher valuations and more difficult earnings comparisons in 2018.
Glossary and Disclaimer for Economic Flash

Equities Total Return

OCT YTD 1 YR
U.S. Large Cap 2.3% 16.9% 23.6%
U.S. Small Cap 0.9% 11.9% 27.8%
U.S. Growth 3.7% 24.9% 29.8%
U.S. Value 0.7% 8.5% 18.3%
Int’l Developed 1.5% 21.8% 23.4%
Emerging Markets 3.5% 32.3% 26.5%

Fixed Income Total Return

OCT YTD 1 YR
Taxable
U.S. Agg. Bond 0.1% 3.2% 0.9%
TIPS 0.2% 1.9% (0.1%)
U.S. High Yield 0.4% 7.5% 9.1%
Int’l Developed (0.7%) 6.7% (0.8%)
Emerging Markets (0.7%) 7.8% 2.3%
Tax-Exempt
Intermediate Munis (0.1%) 3.7% 1.4%
Munis Broad Mkt 0.2% 4.8% 2.1%

Non-Traditional Assets Total Return

OCT YTD 1 YR
Commodities 2.1% (0.8%) 2.3%
REITs 0.1% 6.2% 8.2%
Hedge Funds
Absolute Return 0.4% 3.7% 3.7%
Overall HF Market 0.7% 5.2% 7.0%
Managed Futures 3.9% 1.1% (0.2%)

Economic Indicators

OCT-17 APR-16 OCT-16
Equity Volatility 10.2 10.8 17.1
Implied Inflation 1.9% 1.9% 1.7%
Gold Spot $/OZ $1271 $1268 $1277
Oil ($/BBL) $61 $52 $48
U.S. Dollar Index 88.5 94.0 91.9