Commercial pilots have a few simple goals; to take off and land the plane safely and to get the passengers to where they are going. The pilots don’t make the plane, but they certainly understand how it works. They don’t control the weather either, but must plan and react accordingly to meet these three basic goals. As investment advisors, we don’t control the markets or the environments we are dealt, but are expected to accomplish a similar goal of helping clients get to where they are going. Last quarter we titled this review, “Is a New Wind Blowing?” This quarters’ results seem to indicate that it may be and in the following few paragraphs I hope to outline what we see and how we are steering portfolios in preparation for both the conditions we are currently in and those we see coming.
Source: Blackrock Benchmark Returns Comparison June 2017/Bloomberg
While the U.S. economy passes 96 months of expansion, there are very little signs of it slowing. Because the growth has been fairly slow during this period, it is quite possible that we might experience one of the longest expansions in history. To be clear, this isn’t a declaration that markets must go higher, but does help one to understand why they have continued to grind higher. Investors, comforted by low market volatility, low bond yields, and a stable economic backdrop have been willing to pay more for a dollar of stock earning, especially as these earnings have continued to grow. We have been rewarded for our U.S. stock exposure, but also recognize that higher prices today may mean lower returns in the future, so we must continue to look for opportunities and assess risk. The S&P 500 was up 9.34% thru June 30thw, while the Russell 2000, representing small companies, was up 4.99%.
The first quarter of the year, we cheered positive returns seen in both developed international and emerging markets. This “New Wind” has continued with the EAFE (representing Developed International; think Europe and Japan) being up 13.81%. We feel the market is finally waking up to is the fact that International stocks are a bit cheaper than their U.S. counterparts, earnings are growing, fears of deflation seem to have vanished, and there remains “slack” in many international economies from years of recession and lackluster growth. Simply put, it could be easier for Europe to drop its unemployment rate (which stands at 9.3% thru May) than it will be for the U.S. For investors searching for additional sources of return, many are turning their attention overseas.
Emerging Market Stocks
The same themes driving International returns are driving Emerging Market returns as well, with the addition of one more characteristic: growth. While the U.S. finds it difficult to grow its GDP faster than 2% and other developed nations likewise are stuck in a similar slow-growth pace, the Emerging world appears to be growing more than twice as fast. Combined with lower valuations (cheaper stocks), would make for attractive investment opportunities. The Emerging Market index is up 18.43% thru June 30, 2017. Like a fast-growing toddler, missteps are always a constant risk, so we must be careful in increasing exposure to this area of the markets.
The Federal Reserve appears poised to continue the slow march of rate increases back to a more “normal” target rate. As we mentioned last quarter, the Fed also has announced its plans to reduce its balance sheet, which grew to $4.5 trillion at its peak. They plan to accomplish this by a very simple method….doing nothing. Bonds, unlike stocks, have maturity dates and many bonds held by the Fed will start to mature later this year. While the effects are somewhat unknown, most investors feel this could cause some upward pressure on longer term interest rates. Low excitement is what you want in bonds, and that is what we have gotten thus far this year with rates staying low. The U.S. Aggregate Bond Index has returned 2.27%. 2016’s astounding return in High Yield Bonds is unlikely to repeat unless we first experience a big sell off to get current prices much lower. So far, they have held their value and have earned 4.45% year-to-date (6/30).
Getting You to Where You Want to Go
Like pilots who are thankful for great flying conditions, we have enjoyed a great market environment recently. While we realize that we won’t always have the luxury of clear skies, our clients’ long-term goals must remain our top priority. This requires our commitment to keep an eye on our gauges, find new opportunities, and steer clear of deteriorating conditions. We thank you for your trust in us as a steward of your capital and will continue to focus our efforts on getting you to where you want to go.
This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of July 25, 2017, and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by Bridgeworth, LLC to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks.
Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal, and potential liquidity of the investment in a falling market.
International and emerging market investing involves additional risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments.
The two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments.
Any securities, indices, and other financial benchmarks shown are provided for illustrative purposes only, and reflect reinvestment of income, dividends, and other earnings. They do not reflect the deduction of advisory fees. Investment products are subject to investment risk, including possible loss of the principle amount invested. You cannot invest directly in an index.
Neither Bridgeworth nor its content providers are responsible for any damages or losses arising from any use of this information. To determine which investments may be appropriate for you, consult your financial advisor prior to investing.
Investment advice offered through Bridgeworth, LLC, SEC Registered Investment Advisor.