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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.

THE TAKEAWAY

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

JAN 3 MO 1 YR
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

JAN 3 MO 1 YR
Taxable
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%
Tax-Exempt
Intermediate Munis 0.9% (1.3%) (0.5%)
Munis Broad Mkt 0.5% (2.1%) 0.1%

Non-Traditional Assets Total Return

JAN 3 MO 1 YR
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