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ECONOMIC FLASH – Reasons the Stock Rally Could Continue

July 2017

US Economy: Mixed bag of data.

While consumer confidence hit a 16-year high (118.9) in June, a surprising drop in May retail sales (-0.3%) led investors to speculate that the Fed might hold off on additional interest rate increases.

US Stocks: Biotech boosts small-cap stocks.

Drug and biotech stocks rallied over 14%, on expectations that US government plans to lower drug prices will be coupled with fewer regulatory requirements.

Foreign Stocks: Emerging markets retain lead.

Developed market equities faltered in June, but emerging markets kept going strong, with currencies strengthening vs. the US dollar and improving global growth forecasts.

Fixed Income: 4th Fed rate hike since 2015.

The Fed raised interest rates by 0.25% in June and indicated it would start selling part of its large stash of fixed-income securities (bought to stimulate the economy), which could also put upward pressure on interest rates.

Non-Traditional: US oil producers frustrate OPEC.

Oil prices hit their lowest mark in 2017 as shale-sourced US oil production continued to rise and demand for gasoline remained weak.

THE TAKEAWAY

Despite some weakness in recent economic data, we expect Q2 2017 economic growth to show gains, both in the US and abroad. US corporate earnings are likely to support current lofty stock market valuations through the 2nd half of 2017.

In fixed income, we think interest rates are headed higher but not dramatically higher, and with longer-term rates rising less than short-term ones.

High demand for fixed income, due to demographic and economic forces, is likely to prevent a dramatic shift upward in rates. With this in mind, we are evaluating higher-yielding areas, such as emerging markets debt, for the portion of our fixed-income portfolios seeking excess return

Glossary and Disclaimer for Economic Flash

Equities Total Return

JUN YTD 1 YR
U.S. Large Cap 0.6% 9.3% 17.9%
U.S. Small Cap 3.5% 5.0% 24.6%
U.S. Growth 0.0% 13.7% 20.7%
U.S. Value 1.8% 4.3% 16.2%
Int’l Developed (0.1%) 14.2% 20.8%
Emerging Markets 1.1% 18.6% 24.2%

Fixed Income Total Return

JUN YTD 1 YR
Taxable
U.S. Agg. Bond (0.1%) 2.3% (0.3%)
TIPS (0.9%) 0.9% (0.6%)
U.S. High Yield 0.1% 4.9% 12.8%
Int’l Developed (0.5%) 5.2% (6.4%)
Emerging Markets 0.8% 6.2% 2.9%
Tax-Exempt
Intermediate Munis (0.5%) 3.0% 0.3%
Munis Broad Mkt (0.2%) 3.4% (0.5%)

Non-Traditional Assets Total Return

JUN YTD 1 YR
Commodities (0.2%) (5.3%) (6.5%)
REITs 2.0% 4.9% 0.2%
Hedge Funds
Absolute Return 0.2% 1.4% 2.0%
Overall HF Market 0.4% 2.7% 6.1%
Managed Futures (1.4%) (1.4%) (8.1%)

Economic Indicators

JUN-17 NOV-16 JUN-16
Equity Volatility 11.2 14.0 15.6
Implied Inflation 1.7% 2.0% 1.4%
Gold Spot $/OZ $1242 $1152 $1322
Oil ($/BBL) $48 $57 $50
U.S. Dollar Index 92.0 95.4 89.5