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ECONOMIC FLASH – Markets Sail Through Political Upheaval

February 2017

US Economy: Businesses open their wallets.

Economic growth disappointed for 4th quarter 2016 (+1.9%), as exports fell 4%, due mainly to a drop in soybean exports. However, business spending picked up. Along with rising consumer spending, this provides cause for optimism going forward.

US Stocks: Dow 20,000 on earnings outlook.

Large US growth stocks led in Jan., driven by better-than-expected earnings from multinationals – Apple, Facebook, Boeing – and the prospect for tax and regulatory reform under the Trump administration.

Foreign Stocks: A good start to 2017.

As we had anticipated, emerging markets benefited from a weaker US dollar, stabilizing growth prospects for China, and higher commodity prices. Eurozone inflation and growth also ticked up.

Fixed Income: Quest for yield continues.

The Fed kept interest rates unchanged, and bonds reacted positively. Municipal bonds outperformed on strong demand for attractive after-tax yields.

Non-Traditional: Mixed results for commodities.

Gold rallied on US dollar weakness and concern about US trade and immigration policy. Oil prices held steady.


We are maintaining global diversification in equities, with a preference for foreign markets, especially in developing economies. While we think US equities are supported by corporate earnings growth and the potential pro-business policies under Trump, many foreign markets are less expensive, with similar or higher growth prospects.

We expect the Federal Reserve to raise interest rates twice in 2017, albeit modestly. A sharp rate increase is unlikely, partly because the recent rise in wages (a core component of inflation) could attract more people back into the workforce, thus keeping a lid on wages. Our portfolios remain positioned to benefit from flat or rising interest rates.

Glossary and Disclaimer for Economic Flash

Equities Total Return

U.S. Large Cap 1.9% 7.8% 20.0%
U.S. Small Cap 0.4% 14.7% 33.5%
U.S. Growth 3.2% 7.3% 17.9%
U.S. Value 2.6% 7.2% 18.4%
Int’l Developed 2.9% 4.3% 12.6%
Emerging Markets 5.5% 0.9% 25.9%

Fixed Income Total Return

U.S. Agg. Bond 0.2% (2.0%) 1.5%
TIPS 0.8% (1.2%) 4.0%
U.S. High Yield 1.3% 2.9% 21.0%
Int’l Developed 1.6% (5.5%) 2.8%
Emerging Markets 1.8% (3.4%) 4.2%
Intermediate Munis 0.9% (1.3%) (0.5%)
Munis Broad Mkt 0.5% (2.1%) 0.1%

Non-Traditional Assets Total Return

Commodities 0.1% 3.3% 13.8%
REITs 0.2% 2.1% 12.8%
Hedge Funds
Absolute Return 0.3% 0.3% 0.6%
Overall HF Market 0.5% 2.3% 6.0%
Managed Futures (1.0%) (2.2%) (7.7%)

Economic Indicators

JAN-17 OCT-16 JAN-16
Equity Volatility 12.0 17.1 20.2
Implied Inflation 2.1% 1.7% 1.4%
Gold Spot $/OZ $1211 $1277 $1118
Oil ($/BBL) $56 $48 $35
U.S. Dollar Index 94.8 91.9 95.1