Month: April 2017

Monthly Market Insights

Monthly Market Insights – April 2017

Performance Data and Commentary as of 3/31/2017

DOMESTIC EQUITY

•US stocks posted a small gain in March, despite a mid-month pullback as President Trump’s health care bill to replace the Affordable Care Act failed in Congress. This reduced confidence in Trump’s ability to carry out policy initiatives, but the market rebounded as efforts quickly shifted to tax reform.

•Large cap stocks outperformed smaller caps, but the difference in returns narrowed from previous months. Volatility levels remained subdued, with March 21st the only day with a decline of more than 1% during 2017. Dividend stocks were mixed, with real estate hurt by weaker future prospects for mall and retail properties.

•Growth stocks outperformed value, benefiting from strength in the technology and consumer discretionary sectors. Value stocks were weighed down by weakness in the financial sector, amid uncertainty around policy changes. Energy stocks declined on lower oil prices, with increased US production and OPEC supply cuts unlikely to be extended past June.

The above views are those of AssetMark and are determined by considering the performance of market indices and the Portfolio Strategists' asset allocation.GICS® is The Global Industry Classification Standard (an industry taxonomy developed in 1999 by MSCI and Standard & Poor's (S&P) for use by the global financial community). *See below for indices used in the Style Return.

INTERNATIONAL EQUITY

• The MSCI EAFE international index outperformed US stocks for the month, with lessened political risk in Europe and improving economic data. International stocks rose 2.5% in local currency terms.

• European stocks benefited as businesses reported better economic conditions, while prospects for Le Pen being elected French President diminished. Britain initiated the process of Brexit, but fears of a broader eurozone breakup eased.

• The Asian region gained with lessened fears surrounding US trade policy. Japan was hurt by weaker data on household spending. Emerging markets were lifted by India, as its governing party was supported in the recent election.

COMMODITIES & CURRENCIES

• Commodities were weighed down by lower agricultural prices, with soybean plantings reaching record levels. Energy prices were mixed as oil prices declined, while natural gas prices rose on lower inventories and expectations for higher summer demand. Gold was down only marginally as the weaker dollar supported foreign demand.

• The US dollar declined versus the broad basket of foreign currencies, amid uncertainty around Trump policy plans. Emerging market currencies benefited on lessened fears over US trade policy – the Mexican peso rose 6.2% for the month.

FIXED INCOME

• The US fixed income market finished modestly down for the month, as the 10-year Treasury yield rose from 2.36% to 2.40%. Long-term bonds saw the larger declines with their greater sensitivity to rates. Credit spreads widened, which hurt corporate bonds including the high yield sector.

• International bonds posted modest gains, lifted by foreign currency gains versus the US dollar. Emerging market bonds benefited from improving prospects for economic growth and their higher yields.

GLOBAL DIVERSIFIED PORTFOLIOS
• Equity allocations lifted global portfolios during the month, with better results in the higher risk profiles. Global diversification benefited returns as international equities beat the US market.
• Fixed income saw smaller moves across most bond sectors. International bonds received a modest lift from exposure to foreign currencies, which appreciated versus the US dollar.
 
*Global Market Index returns use a combination of the MSCI ACWI equity index and Bloomberg Barclays Global Aggregate bond index corresponding to investor risk profile. For example, the Profile 1 index is comprised as follows: 20% MSCI ACWI / 80% Bloomberg Barclays Global Aggregate Index. Allocations are rebalanced on a monthly basis. All index data represents total return including the reinvestment of dividends for the stated period. All returns are obtained from Zephyr StyleAdvisor, except sector returns, which are from Morningstar Direct.
DOMESTIC EQUITY

Sector Returns: Sector returns are obtained from Morningstar Direct and reflect the returns of the S&P 500® Sector Indices. The 11 sector indices are classified using the Global Industry Classification Standard (GICS®), a four-tiered industry classification structure.

Style Returns: Style box returns based on S&P Indexes. All values are cumulative total return for stated period, including reinvestment of dividends. The Index used for each box from left to right, top to bottom are:

S&P 500 Value, S&P 500®, S&P 500 Growth

S&P MidCap 400 Value, S&P MidCap 400®, S&P MidCap 400 Growth

S&P SmallCap 600 Value, S&P SmallCap 600®, S&P SmallCap 600 Growth

INTERNATIONAL EQUITY

All indexes except S&P 500 provided by MSCI.

COMMODITIES & CURRENCIES

Commodities are represented by the Bloomberg Commodity Index. Foreign currencies are measured versus the US dollar with returns obtained from Zephyr StyleAdvisor. The US Dollar is represented by the Bloomberg US Dollar Index.

FIXED INCOME

The US Aggregate is the Bloomberg Barclays US Aggregate Bond Index; cash is represented by the Citigroup 3-month T-Bill Index; Short-Term is represented by the Bloomberg Barclays US Treasury 1-3 Year; Long-Term by the Bloomberg Barclays US Treasury Long Index; Governments by the Bloomberg Barclays US Government Intermediate Index; Corporates by the Bloomberg Barclays US Corporate Investment Grade Index; High Yield by the Bloomberg Barclays US Corporate High Yield Index; TIPS by the Bloomberg Barclays US Treasury TIPS Index; Municipals by the Bloomberg Barclays US Municipal Bond Index; International by the Bloomberg Barclays Global Aggregate ex-US Index; Emerging Markets by the Bloomberg Barclays Emerging Markets USD Aggregate Bond Index.

AssetMark, Inc.
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Concord, CA 94520-2445 800-664-5345

Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material has been prepared for informational purposes only. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation. It is not possible for one to invest in an index. Past performance does not guarantee future results.

AssetMark, Inc. is an investment adviser registered with the Securities and Exchange Commission. ©2017 AssetMark, Inc. All rights reserved.
6428 | M0000 | 3/2017 | EXP 9/30/17

For use with the general investing public.

A Republican Crack Up and the Stock Market

The death of repeal and replace, the Trump agenda, and stocks

There was no shortage of angst in the investment community that a Donald Trump victory in last year’s election would send shares down sharply, at least in the immediate aftermath of a Trump win.

In reality, just the opposite happened, with stocks surging in the wake of his surprise victory.

The pre-election-day conventional wisdom didn’t pan out.

Instead, investors quickly warmed to the idea that a Republican President and a Republican Congress would quickly enact a pro-business agenda that would fuel economic growth, and by extension, corporate profit growth.

It was an ambitious agenda that included a steep cut in corporate taxes, individual tax cuts, and tax reform, regulatory reform, and new outlays for infrastructure and national defense.

Sure, Republicans have never been fond of boosting domestic spending, but tax cuts and regulatory relief have always been a staple in the conservative agenda. Even then, Trump could strike a deal with Democrats to boost much-needed spending on roads, bridges, and airports.

Of course, the Affordable Care Act, aka Obamacare, was dead, right? Republicans haven’t been shy about trying to repeal President Obama’s signature accomplishment ever since they obtained majorities in the House and Senate.

Well, proposing policy changes while still on the sidelines is one thing. Enacting those changes is another.

Much like a UFC fighting match, things got ugly fast, at least from the vantage point of the Republican leadership and President Trump.

Let me briefly stop here and emphasize that I am not taking a stance on Obamacare, nor am I arguing that the House Republican plan to repeal and replace was the right prescription for what ails the current system.

Instead–and this is critical–I want to view what happened on Capitol Hill through the eyes of a non-partisan investor who is invested in a diversified portfolio, one that includes a stake in the global economy and the major sectors of the U.S. economy.

Stocks and a political brick wall

If Republicans can’t enact their agenda, won’t that quash the so-called Trump rally? Won’t shares take a beating? I’ve seen a fair number of headlines that suggest such a scenario, so let’s address it.

I believe the stock market reaction to the failed repeal and replace effort sheds some light as to how the market may react to the potential gridlock over tax reform.

Let me explain.

The failure of the Republican health care plan has graphically highlighted the deep divisions within the Republican party. No longer do investors expect corporate and individual tax reform to sail through Congress–a stark contrast to market sentiment late last year.

So, what if tax reform goes the way of repeal and replace? Will stocks take a beating? Unlike the mixed reaction to health care reform, investors have been salivating over the prospect of a cut in the corporate tax rates.

There was little fallout in the market from the failure of Republican health care, with most major indexes rising in the week following the decision to shelve the bill (WSJ).

While a cut in corporate taxes might be considered the “crown jewel” for the market, what investors want is respectable economic growth that produces respectable corporate profit growth.

Put another way, if it doesn’t materially impact the U.S. economy and the economic outlook, investors have historically turned their focus back to the fundamentals.

Currently, Thomson Reuters estimates that Q1 S&P 500 profits will rise a strong 10.2% (estimate as of March 31), the best year-over-year advance in over two years. And estimates for the remainder of the year are promising.

There will be winners and losers among the politicos on Capitol Hill. Some of you will join in those celebrations, while others will seek solace. Ultimately, investors who maintain a disciplined approach and avoid being whipsawed by shifting bullish/bearish sentiment stand the best chance of reaching their financial goals.

If there are any additional questions or concerns you may have, feel free to email or call me. That’s what I’m here for and I’d be happy to offer additional insights.

Table 1: Key Index Returns

MTD % YTD % 3-year* %
Dow Jones Industrial Average -0.7 +4.6 +7.9
NASDAQ Composite +1.5 +9.8 +12.1
S&P 500 Index 0.0 +5.5 +8.1
Russell 2000 Index 0.0 +2.1 +5.7
MSCI World ex-USA** +2.1 +6.1 -2.3
MSCI Emerging Markets** +2.4 +11.1 -1.2
Bloomberg Barclays US Aggregate Bond TR -0.1 +0.8 +2.7

Source: Wall Street Journal, MSCI.com, CNBC, Morningstar

MTD returns: February 28, 2017—March 31, 2017

YTD returns: December 30, 2016—March 31, 2017

*Annualized

**in US dollars

 

 

Surging consumer confidence and the economy

Surveys of consumer and business confidence have surged since the election, including the Conference Board’s survey and the NFIB’s survey of small business sentiment.

A stirring of the “animal spirits” is seemingly a prerequisite for economic activity. Without rising optimism, consumers and businesses are less likely to spend and boost economic growth.

At the March meeting of the Federal Reserve, central bankers raised the fed funds rate by 0.25% to a range of 0.75%-1.00%, and Fed Chief Janet Yellen took a cautiously optimistic stance on the economy.

However, in response to a question at her quarterly press conference, she noted, “I wouldn’t say at this point that I have seen hard evidence of any change in spending decisions based on expectations about the future.

“I think it’s fair to say that many of my colleagues and I note a much more optimistic frame of mind among many, many businesses in recent months. But, I’d say, most of the business people that we’ve talked to also have a wait-and-see attitude and are very hopeful that they will be able to expand investment.…I’m not seeing that at this point (increased spending), but the shift in sentiment is obvious and notable.”

In other words, the good cheer being reflected in confidence surveys, including the highest reading in almost 17 years from the Conference Board’s Consumer Confidence Index, has yet to materially translate into faster growth.

One vivid example–the widely followed GDPNow model from the Atlanta Fed suggests Q1 GDP is set to rise a scant 0.9% on an annualized basis.

That may change between the March 31 reading and the release of the GDP report at month’s end, but it’s not a ringing endorsement of economic activity.

Bottom line

For the long-term investor, it all revolves around economic activity and earnings growth. I recognize I’ve hammered this theme home before. And I suspect I’ll bring it up in future communiques, too.

But my sincere desire is to see you reach the goals we’ve talked about in our many conversations. Getting sidetracked by the story of the month will only serve to delay the achievement of these goals.

Once again, let me emphasize that it is my job to assist you! If you have any questions or would like to discuss any matters, please feel free to give me or any of my team members a call.

As always, I’m honored and humbled that you have given me the opportunity to serve as your financial advisor.

­­­­­­­­­­All investing involves risk and no strategy can guarantee success. All data are taken from sources believed to be reliable, but Royal Alliance makes no guarantee of their accuracy. All suggestions are general in nature and may or may not reflect your individual situation.