global markets

View from the Chair: Windermere's Market Perspectives (July 2017)

Summary of Market Performance June 2017.jpg

Just like that, we’ve sailed thru six months of 2017.   The tumultuous waters of 2016 (remember market correction to start the year, Brexit, and the election?  Perhaps not) seem like a distant memory and 2017 has marched ahead without hesitation.  Smooth sailing so far this year– but what waters lie ahead for the rest of 2017? 

 

Point in the Harbor

As we dock at the midpoint of 2017, It’s safe to say that from an investing perspective (especially one with an equity focus), we find ourselves in a far better than expected.  Global equities have experienced incredibly strong results, with the emerging markets being standouts as commodity prices stabilized, the US dollar retreated, and the middle class in those regions continued to experience rising disposable income. 

The global economy is on pace for one of its best years in more than half a decade.  All of the world’s top 20 economies are growing so far this year, which is boosting growth across the emerging markets. International markets are also relaxing a bit as the protectionist rhetoric that loomed large during the election and early this year has been tamed. 

US equities also standouts, rising over 8% (as measured by the S&P 500) and experiencing near record-setting low volatility, despite the heightened geopolitical concerns and ongoing political sagas at home (firing of FBI director, ongoing investigations into the election and Russia ties to name a few)

The US economy continues to glide along.  As a Schwab market update recently stated, the growth is more reflective of a pontoon boat than a speed boat.  Growth keeps slowly trending upwards, which is actually good for the economy as it keeps inflation low and monetary policy easy. Earnings have also been strong, which has contributed to a large portion of the market’s advance.

The Waters Ahead

All the factors above, as well as careful stock and sector selection and a bit of good timing and good fortune, have gotten us to this point.  But what will the rest of the year brings?  We anticipate a two-step forward, one-step back movement, where slight pullbacks will continue to occur as geopolitical tensions remain and monetary policy “experiments” from the past several years continue to be unwound.

Further, from a political perspective, there remains a considerable amount of work yet to do.   Despite bold statements and brazen Congressional initiatives during election season and the first 100 days, there has yet to be many accomplishments.  Healthcare reform continues to be debated.  The grand tax reform proposals seem to be stalled.  Little progress has been made on infrastructure.  The promised rollback for burdensome regulations has yet to appear.   Should any of these initiatives be implemented, we could see material market reactions.

Sail On

Where does this leave us?  Our advice remains the same as it has been -  “Sail on” my friends.  We see mostly steady waters  - but it won’t be without some waves.  After all, the long-term compounding of wealth requires a clearly-charted course, patience, experience, and a little luck from the “sea” .

View from the Chair: Windermere's Market Outlook (February 2017)

If the market's new year's resolution was to continue 2016's upward trend, they are certainly proving to be disciplined and focused thus far.  January was a strong month for virtually all markets, as detailed in the table below.  US equity markets were up between 1.5 and 4%, with the NASDAQ leading the charge as technology rebounded on strong earnings.  International markets were the leader, with emerging markets up over 5% and developed markets not far behind at 3%.  Fixed income even held its own as interest rates receeded slightly from year-end highs

What's driving this continued rise?  Remember that market prices are meant to represent the present value of anticipated future events (ie: cash flows).  As a result, we believe much of the recent appreciation is the pricing-in of an anticipated favorable business environment under the new administration (namely, lower regulation).  Coupled with strong earnings (on top and bottom line) and continued employment growth, markets are marching higher.  

How likely is it that markets can continue on this path?  We wish we had the answer.   However, there are a few things we know for sure as we move forward in 2017:

1. Uncertainty in a Certainty - Yes, this has always been the case but now more than ever, there is no clear path forward.  With an administration determined to change Washington and a president communicating via Twitter, markets are going to be reactive and at times volatile.  Time will tell how nature and extent of policy changes on many key points (immigration, international trade, regulation, energy policy, etc).  In the meantime, expect uncertainty to prevail and remember - that too can lead to opportunity and good entry points.

2. The Best Defense is a Good Offense - The best way to combat this uncertainty is thru active management.  Being invested in the proper sectors, countries, and individual securities is more important than ever.  There will be winners and losers during this continued global economic recovery.  Staying on top of developments and actively managing accounts is essential.

metal.jpg

3. Going up - We are closely watching inflation levels, a topic that has been noticeably missing in recent years.  However, as labor force tightens and energy prices reach record level year-over-year price increases, it's likely that we'll see higher-than-expected inflation as well.  This drives us towards inflation-oriented investments such as TIPs and mining and metal related companies. 

4. Also Going Up - Interest rates.  The Federal Reserve Bank has strongly indicated it will continue raising rates throughout 2017.  We are keeping a close eye on the long-end of the yield curve and are favoring shorter duration (hurt less by rising rates) and higher yield (credit risk offsets interest rate risk) within our fixed income allocations

5. Explore the Globe - As we've always said, it's essential to build a global portfolio.  Even with the "america first" messaging, there remains extensive investment opportunity beyond the US borders.  We are focused on emerging countries with a rising middle class, improving demographics, and exposure to the improving commodity picture. Developed countries are a mixed picture - with commodity-focused economies like Canada, China, and Mexico likely poised to rebound but European countries still struggling (despite accomodative monetary policy) due to overhanging issues related to Brexit, upcoming elections, and ongoing immigration challenges.  

It's been an exciting and unprecedented year thus far and we are anxiously awaiting what lies ahead.  Invest on!