Q2 2017 - Steady as She Goes
COMMENTARY FROM THE TRUST INVESTMENT COMMITTEE
Q2 2017 - Steady as She Goes
The S&P 500 just notched another positive quarter making it seven consecutive quarterly gains. Central Bank chatter continues to drive the financial markets and not just in the U.S. The U.S. absorbed another interest rate hike in June moving the Fed Funds target to a range of 1.00% to 1.25%. Joining the U.S. are the Bank of Canada and Bank of England with modest tightening moves of their own. All U.S. rate increases going back to December 2015 have been met with little market reaction and investors are taking that as a positive. Predictions for one more interest rate increase in 2017 is anticipated and the timing looks like December 2017. Janet Yellen recently reassured markets that rate increases will be gradual which has kept a bid in the equity market. Politics in Washington cannot be avoided as Congress wrestles with the fate of Obamacare and impatience is starting to build around promised fiscal measures like tax reduction and infrastructure spending.
In the quarter, market gains were rather broad in nature across all major asset type categories. The Dow Jones Industrial Average posted a +3.95% return further expanding its YTD total to +9.35% for 2017. The S&P 500 nearly matched the Dow Jones average with a +3.09% return of its own taking its YTD gain to +9.34%. Technology was the best performing sector in the quarter courtesy of the FANG group (Facebook, Amazon, Netflix and Google parent Alphabet). Energy continues to be the worst performing sector as previously announced OPEC cuts continue to be overshadowed by U.S. production. The small-cap and mid-cap indices turned in positive quarters but fell short of the large-cap indices, particularly the value areas of these asset classes. U.S. economic data was mixed but there was enough reason for the Fed to continue on its path towards higher rates. On the employment front April generated 211,000 in job gains, May came in at 138,000 jobs and June came in at 222,000 jobs. The US dollar continued to weaken as pro-growth policy action continues to be deferred into the future while International markets are showing signs of strengthening.
This year could be the year where global diversification finally pays off in a big way. The MSCI EAFE index returned +6.12% for the quarter taking YTD gains to +13.81%. The MSCI Emerging Markets index had a similar return of +6.27% for the quarter resulting in YTD gains over +18%. The main reasons for the strong results are less political uncertainty across the Eurozone and better economic and earnings comparables. As we write, the IMF recently gave the Eurozone, China and Japan higher GDP revisions for the next two years while the U.S. was downgraded slightly.
Regarding fixed income, the 10-year treasury yield finished at nearly the same level as it did on 12/31/2016. However, the underlying volatility has been remarkable. In March 2017 the 10-year yield hit an intra-year high of 2.60% only to fall to nearly 2.15% a short time thereafter. Low inflation expectations and sub 2% GDP is enough to entice investors to maintain allocations in fixed income. Similar to equities, investors that approached fixed income with a multi-sector lens benefited. Non-traditional areas like preferred stock, high yield and global fixed income returned mid-single digits defying what was supposed to be a challenging year for bonds in general.
THOUGHTS ON ASSET ALLOCATION
Recently there were two headlines next to each other on CNBC that couldn't be more different in their opinion. One headline read "Recession and Major S&P 500 Correction Could be Years Away." Immediately below, the second headline read "Reliable Market Indicator Flashes Major Warning to Equity Investors." We can't emphasize enough that our clients remain absolutely focused on their long-term financial objectives and not get pulled into the financial news media circus. Contradicting headlines aside, the Trust Investment Committee (TIC) continues to remain diligent in crafting its outlook but has maintained our current allocations and investment manager selections. Risks are inevitably present and we have prepared our allocations by having a slightly higher cash balance and dedicated positions to alternative managers built to withstand increased volatility. With elevated market valuations, our overall equity model does have a value tilt while largely avoiding the "growth" frenzy led by very few constituents. Volatility is at decade lows causing a complacent backdrop. If market volatility unexpectedly returns a wave of selling in the areas that are most crowded could take place; namely the FANG group.
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 Q2, however, the managers listed below performed exceptionally well vs. their stated benchmarks.
Investment Manager * Q2 2017 Return Manager Benchmark
T. Rowe Price Inst. LC Growth Fund +8.06% +4.67% Russell 1000 Growth
Oakmark Fund +3.85% +1.34% Russell 1000 Value
Schafer Cullen Dividend Value +3.04% +1.34% Russell 1000 Value
Dana Large Cap Core +3.99% +3.09% S&P 500
MFS International Discovery Fund +8.60% +6.37% MSCI EAFE
*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.