The portfolios continued to have positive results for the last year ending March 31st. International assets did better than domestic, and the sectors were mostly positive. Interest rates have been moving higher which is now starting to translate into actual interest income in the portfolios.
Equity markets started strong in 2018, but quickly gave way to fears of a trade war and an increasingly hawkish Fed. Against that backdrop, economic growth and earnings were strong, even after the late January market correction. There is little chance of a near-term recession, as such, we maintain our positive outlook for the foreseeable future.
Asset Class Performance Over the Last Twelve Months:
CASH
- Yields on cash assets moved higher in 2018, although many banks and brokerages are paying significantly under market rates.
- The 13-week T-Bill began 2018 at 1.44% and ended the quarter noticeably higher at 1.73%.
BONDS
- Over the last year, yields have risen as the Fed continues to reduce their balance sheet.
- Short-term bonds turned in slightly positive returns for the quarter, while longer-term bonds declined noticeably. The short-duration S&P Treasury Bond Index was up 0.8% while the long-duration index was off -1.0%.
- Foreign bonds turned in positive results as central banks overseas kept rates low as volatility persisted. The decline in the U.S. Dollar also added to performance.
STOCKS (see chart above):
- All categories turned in positive returns except for Precious Metals.
- The Dow Jones Industrial Average was up 13.9% for the last year but was off -0.6% for the latest quarter. The more broadly-based S&P 500 Index climbed 14.0% for the last twelve months but was also down -0.8% for the first quarter of 2018.
- International equities performed well over the last year as the broad-based MSCI EAFE Index moved up 14.8%. European equities (MSCI Europe) turned in solid returns, with an increase of 15.1% over the last year. The Pacific Rim markets were positive with Japan (MSCI Japan) up 20.0%, while Asian stocks (MSCI Asia-Pacific ex Japan) posted a 17.7% return over the last year.
- Utilities (which are interest-rate sensitive) provided a paltry 0.4% return over the last year.
- Technology was the top sector with an outstanding 28.0% return for the last twelve months.
- Energy stocks remained positive as oil prices continued to move higher. Energy stocks (MSCI ACWI Energy Index) turned in a 7.8% return for the last year.
12-24 Month Outlook:
- The latest U.S. GDP (Gross Domestic Product) increased at an annual rate of 2.9% in the fourth quarter of 2017. This is slightly below the 2017 third quarter rate of 3.2%.
- We expect the global economy to have strong GDP growth. The IMF forecasts a 3.9% GDP growth rate in 2018, and the advanced economies with a 2.5% growth rate.
- Inflation is becoming more noticeable with the CPI (Consumer Price Index) increasing to 2.4% in March 2018. This is in line with the Fed’s target.
- The Fed is reducing their balance sheet. As such, we expect interest rates to continue to rise into the foreseeable future.
- Many companies should have a noticeable improvement in earnings from the Tax Cuts and Jobs Act of 2017.
- The unemployment rate was 4.1% domestically in March, unchanged for the last six months. Globally, employment has been improving and is expected to remain relatively stable for the near term.
Investment Strategy Moving Forward:
Our overall strategy is mostly unchanged from last quarter.
- CASH – The Fed will continue to raise rates for the near-term, albeit slowly. We believe cash / money market funds will begin paying out rates above 1.5%. For now, our cash allocations will remain low.
- BONDS – We are still avoiding long-term bonds in our holdings as rates continue to climb. International bonds should do well as central banks overseas refrain from raising rates.
- STOCKS – Looking forward, our outlook remains unchanged, the best opportunities are in equities. Stocks look favorable due to continued growth, reasonable valuations, and improving consumer demand.
- Domestic Large-Cap stocks should benefit most and remain our largest asset class.
- European stocks are attractive as their economies are improving and their valuations are cheaper than the U.S.
- Asian stocks should do well as their growth continues to improve.
- With the increasing inflation rate, we believe the commodity-based asset classes (Energy and Precious Metals) should have good growth potential.
Our perception of the markets is positive with some head winds. On the plus side, we have continued earnings growth globally and favorable tax policy domestically. On the negative side, we have the Fed raising interest rates and concerns about trade. Notwithstanding, we expect continued global growth with low-to-slightly higher inflation, which should bode well for the stock markets of the world. There are no meaningful indications of an economic recession occurring in the near-term. As such, we continue to maintain a bullish stance moving forward.
Please let us know if you have any questions on the overall strategy and holdings in your personal portfolio. We are always happy to chat about your individual financial situation. We greatly appreciate the confidence you have shown in our services. Thank you for your business!
