Monthly Outlook: April 2017

It was a very good first quarter with solid gains coming from the global equity markets. U.S. stocks (Russell 3000) gained 5.6% though they stalled in March with a 0.1% gain. International stocks (MSCI EAFE) were the star of the quarter with a gain of 7.8%. On the other hand, stability assets (bonds) did their job to reduce volatility but acted as an anchor to diversified portfolio returns. The Barclays Aggregate bond index was only up 0.7% for the quarter. Lastly, commodities lost 3.0% and REITs gained a modest 0.9%. We sold these two small positions in March as a result. All in all, we had a good quarter and captured some nice upside. Within each portfolio’s equity allocation, we are now almost fully invested because the trends remain “up.” Don’t fight the trend! We are optimistic these uptrends will continue for now and we expect to see more growth in the quarters ahead.

It’s All About Expectations

Investors should assess both current conditions and future expectations. Think about buying stock in company ABC. You’d want to look at past sales and earnings growth, management, and valuations based on actual historical data. If we look at the S&P500, we can see that earnings are, in fact, growing steadily from $86.53 in 2015 to $94.55 in 2016. That’s important historical data. Valuations, using historical data, are all showing very over‐valued levels, which is a risk. But what investors really care about is the future. According to S&P analysts, the forecast for 2017 earnings are $118.83 and $130.03 for 2018. Of course their guesses will be wrong, but the direction and level of these growth forecasts reflect a lot of optimism for one reason or another. You don’t have to agree, but that’s what “the market” is pricing in.

Other factors that investors look at to divine the future include the political landscape, central bank decisions, consumer confidence, employment, retail sales and production, GDP, global peace, and more. And for now, “the market” sees blue skies and business friendly outcomes. We know from talking to many clients that

many of you are not nearly so optimistic. But from an investor’s perspective, as long as tax cuts and deregulation are on the table, and as long as the Fed promises to only gradually raise interest rates slightly because GDP is growing, and as long as employment and confidence remain so positive, then stocks will continue to provide positive returns. And it is our assessment that it will take many months to get any clarity or consensus on these issues, one way or the other. Change just takes a long time but investors seem hopeful and optimistic as they wait. We will continue to monitor the news but we can more easily see changes in expectations by directly watching each of the markets and their moving average trendlines. When expectations eventually change to the negative, we will see a crossover of asset prices from above the trendline to below the trendline. That is our signal for when we will trim back our exposure to growth assets and move to protection mode. But that is not today.

Thinking Beyond Markets

For now, as we just explained, markets are in growth mode and we should let our portfolios ride to capture the returns. Perhaps that gives us an opportunity to think about other matters. Portfolio returns should be just one piece of your personal jigsaw puzzle. Of course, it’s the piece that we primarily focus on for you and we’ll continue to do so. But let’s take a moment to reflect on a few other items that can affect your wealth and happiness: Is your level of total debt in check? Servicing debt in the recent low interest rate environment is easier than it would be in the future with higher rates. Is your estate plan current? We’ve seen investors work hard to accumulate wealth only to have it dissipate upon their passing. Is your spending in line with your assets and income? How is your health? We’ve seen many cases where an illness or injury severely affects one’s life and the lives of their family. Investing in your mental and physical health is always one of your best investments! And of course, the state of your family relationships and friendships makes life worth living. Let’s all think bigger and keep in mind that life is pretty good. We’ll watch the markets for you and invest for growth and protection.