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ECONOMIC FLASH – A Strong Finish Likely for the Year

December 2017

US Economy: Firm foundation.

Economic data continued broadly positive, with unemployment at only 4.1%, rising personal income (+0.3%) and spending (+0.4%), boding well for retail sales. For Black Friday and Cyber Monday, sales were up nearly 16% from last year.

US Stocks: Equities jump again.

Robust economic data contributed to a Nov. rally in US equities, bolstered by expectations for tax reform in 2017, including lower corporate tax rates.

Foreign Stocks: Non-US equities lag.

Despite the fastest European job growth in 17 years and healthy manufacturing data, uncertainty about Brexit negotiations and Germany’s difficulty in forming a coalition government gave investors pause.

Fixed Income: Downside of tax reform.

The yield spread between junk bonds and Treasuries rose 0.5% — to almost 4% at one point in Nov. – as Congress mulls eliminating the tax-deductibility of interest payments, which would hurt lower-quality bond issuers. Municipal bond issuance surged on tax reform proposals to limit tax-exempt status.

Non-Traditional: Bitcoin bravado.

Cryptocurrency investing remains highly speculative. Toward the end of November, the value of 1 bitcoin surpassed $11,000.

THE TAKEAWAY

We expect stronger Q4 growth and corporate earnings, in the US and abroad, to support equity markets through 2017. Still, we continue to evaluate more defensive positioning given higher valuations and more difficult earnings comps in the coming quarters. At this point, the potential boost from tax cuts appears to be baked into current market valuations.

For fixed income, the tax reform being proposed is likely to increase the deficit and the issuance of shorter-term US Treasury bonds. Higher issuance, coupled with the Federal Reserve’s focus on tightening credit, is likely to cause yields to rise faster on shorter-term debt than long-term debt. We continue to recommend fixed-income strategies that have a lower correlation to interest rates.
Glossary and Disclaimer for Economic Flash

Equities Total Return

NOV YTD 1 YR
U.S. Large Cap 3.1% 20.5% 22.9%
U.S. Small Cap 2.9% 15.1% 18.3%
U.S. Growth 3.0% 28.7% 30.3%
U.S. Value 3.1% 11.8% 14.7%
Int’l Developed 1.1% 23.1% 27.3%
Emerging Markets 0.2% 32.5% 32.8%

Fixed Income Total Return

NOV YTD 1 YR
Taxable
U.S. Agg. Bond (0.1%) 3.1% 3.2%
TIPS 0.1% 2.1% 2.0%
U.S. High Yield (0.3%) 7.2% 9.3%
Int’l Developed 2.2% 9.0% 7.6%
Emerging Markets 1.0% 8.9% 8.1%
Tax-Exempt
Intermediate Munis (1.1%) 2.5% 3.1%
Munis Broad Mkt (0.4%) 4.4% 5.5%

Non-Traditional Assets Total Return

NOV YTD 1 YR
Commodities (0.5%) (1.2%) 0.5%
REITs 2.7% 9.0% 13.9%
Hedge Funds
Absolute Return (0.6%) 3.1% 3.3%
Overall HF Market 0.1% 5.2% 6.1%
Managed Futures 0.2% 1.7% 2.3%

Economic Indicators

NOV-17 MAY-17 NOV-16
Equity Volatility 11.3 10.4 13.3
Implied Inflation 1.9% 1.8% 2.0%
Gold Spot $/OZ $1275 $1269 $1173
Oil ($/BBL) $64 $50 $50
U.S. Dollar Index 88.2 94.0 91.9