US Economy: Good news on growth.
US Q2 GDP growth was revised to 3.0% (from 2.7%), the highest pace in two years. Job openings (6.2 million) and monthly unemployment claims (236,000) both are near historically optimal levels.
US Stocks: Small-cap equities lag.
As we have expected, smaller stocks continue to lag large ones, partly due to valuation concerns. Another factor: large stocks tend to get more of their profits outside the US, where stronger local currencies have boosted demand for US goods and services.
Foreign Stocks: Less Eurozone stimulus?
Emerging markets outperformed developed ones on concern that the European Central Bank would soon cut back on stimulus given the rebound in Eurozone economies.
Fixed Income: Foreign bonds lead.
A weaker US dollar has boosted returns on bonds issued in foreign currencies. Bonds in developed foreign markets are yielding only 0.5%, unattractive in our view.
Non-Traditional: Managed futures add value.
Managed futures benefited from price trends in equities and metals in August. Many hedge fund strategies also performed well.
US GDP may face headwinds from the damage caused by hurricanes Harvey and Irma, as well as a potential government shutdown. Still, these and other potential drags are not likely to show impact until 2018.
Within equities, we have grown more cautious due to rising valuations and the recent uptick in volatility, driven by geopolitical concerns. We are evaluating whether our portfolios may benefit from more defensive positioning as we head into Q4.
Within fixed income, US interest rates could move slightly higher as the Federal Reserve begins selling fixed-income securities on its balance sheet, which we expect to happen by year-end. We are adding emerging market (EM) bonds to LNWM portfolios to benefit from improving creditworthiness and relatively stronger EM currencies.
Equities Total Return
|U.S. Large Cap||0.3%||11.9%||16.2%|
|U.S. Small Cap||(1.3%)||4.4%||14.9%|
Fixed Income Total Return
|U.S. Agg. Bond||0.9%||3.6%||0.5%|
|U.S. High Yield||0.0%||6.1%||8.8%|
|Munis Broad Mkt||0.8%||5.0%||0.9%|
Non-Traditional Assets Total Return
|Overall HF Market||0.3%||3.8%||5.6%|
|Gold Spot $/OZ||$1321||$1248||$1309|
|U.S. Dollar Index||89.7||94.7||90.9|