QUARTERLY UPDATES

Q3 2017 Home Stretch

COMMENTARY FROM THE TRUST INVESTMENT COMMITTEE


Q3 2017 - Home Stretch

Another quarter in the books and records continue to be made as the market continues its ascent to new highs. The S&P 500 notched another positive quarter making it eight consecutive quarterly gains. Investor confidence runs high and market volatility is at an all-time low. The market has gone over 1,500 days without a 15% correction, the third longest stretch since 1930. Furthermore, the market has moved 1% or more in either direction in only 5% of trading days this year, a 25-year low. The S&P 500 returned a solid 4.5% for the quarter and has made over 40 record highs in 2017. The Federal Reserve did not increase interest rates in the quarter, however, Janet Yellen did begin to outline a plan to unwind the Federal Reserve balance sheet that has swelled to $4.5 trillion. The process will take years to complete reassuring investors that ample monetary accommodation is still in place. In September the "Trump Trade" areas of the market rallied in a big way as tax reform became front and center once again. Tax package details have been released which has set the foundation for Congress to start official negotiations on legislation.

In the quarter, market gains were broad across all major asset type categories. Looking closer, a large performance difference remains between growth and value. Large cap growth is outperforming large cap value by 13% this year clearly indicating investor preferences for the information technology sector and securities with high P/E ratios. The high flying FANG (Facebook, Amazon, Netflix, Google) group continues to garner attention and they hold sizeable market cap positions in the most common of ETF vehicles. Consumer staples was the worst performing sector as investors preferred "risk-on" sectors. The small-cap sector turned in a flat performance for the year through August. However, as tax-reform became a main headline out of Washington, investors quickly revisited the sector in September pushing the index towards a return of 6.24% on the month. U.S. economic data remains strong with GDP projections expected to inch up towards 3.0% for Q3. Earnings season has started and the reports so far have been encouraging with earnings growth expected to be in the upper single digit range. Global risks remain and should not be overlooked. The North Korea situation is clearly being ignored by the markets as of now but that would change quickly if tensions escalated. Market valuations are considered elevated making corporate earnings increasingly more important to future performance.

This year has been more than a U.S. story. We are seeing a synchronized global recovery with Europe, Emerging Markets and Japan all performing in-line or ahead of the U.S. The MSCI EAFE index returned 5.40% for the quarter taking YTD gains to 19.96%. The MSCI Emerging Markets index had a similar return of 7.89% for the quarter resulting in YTD gains of over 27.28%. The main reasons for the strong results are less political uncertainty across the Eurozone and better economic and earnings comparables. The last major political hurdle has passed with Chancellor Merkel getting nominated for another term removing a cloud of uncertainty. Focus now turns to the ECB and monetary policy direction as we move in to 2018.

Regarding fixed income, the 10-year treasury yield remains in a tight range of 2.10% to 2.35%. Until September, the 10-year yield looked like it was going to dip below 2.00%. However, tax reform discussions caused bonds to sell-off at quarter end causing yields to spike upwards toward 2.30%. Inflation is contained for now and enough speculation exists surrounding tax reform that investors have not completely given up on the asset class. We continue to argue that fixed income serves as a vital component in a diversified portfolio and will act as a buffer against equity volatility.

THOUGHTS ON ASSET ALLOCATION

The Trust Investment Committee remains comfortable with our current allocations in equity and fixed income. Discussions are currently taking place about asset allocation direction for 2018 which may include a reassessment of our International weighting. It is encouraging to see active management make a comeback this year as we return to a more normalized interest rate policy which will drive fundamentally driven strategies. We can't emphasize enough that our clients remain absolutely focused on their long-term financial objectives. News headlines are inundated with opinions about market direction and we strive to keep our clients focused on what is necessary to reach their ultimate financial objectives. Our portfolios continue to emphasize value over growth as we want to be more mindful of risk and valuation this late in the cycle.

Regardless of the market environment and news flow, we never waiver on investment manager selection that focuses on high quality fundamentals and downside protection. All our equity and fixed income managers had a positive absolute return in Q3, however, the managers listed below performed exceptionally well vs. their stated benchmarks.

Investment Manager  /  * Q3 2017 Return  /  Manager Benchmark
 
T. Rowe Price Inst. LC Growth Fund / +7.33% / +5.90% Russell 1000 Growth
 
Oakmark Fund / +5.76% / +3.11% Russell 1000 Value
 
Cambiar International Equity / +7.27% / +5.40% MSCI EAFE
 
Dana Large Cap Core / +6.38% / +4.48% S&P 500
 
Granite Small Cap Growth  / +6.84% / +6.22% Russell 2000 Growth

*Returns are expressed as composite returns. Results may vary. Past performance is no guarantee of future returns

We look forward to speaking with all of you regarding our views and the performance of your respective portfolios. For additional information or questions please contact Mason Williams, Chief Investment Officer, at 786-497-1214 or Gerardo Rodriguez, Investment Officer, at 786-292-0310.