The portfolios turned in positive results for the quarter and last 12 months ending June 30th. Domestic asset classes did better than international, and the sectors were mostly positive with some stellar returns. Interest rates continue to move higher as the Fed is slowly increasing the Fed Funds rate.
Global equity markets have performed well over the last year, although 2018 year-to-date performance is mostly flat. The markets experienced a short correction in the first quarter of 2018 and have been making modest gains since. The U.S. appears to be the best performing economy of the developed nations, while the Eurozone seems to be cooling. There is little chance of a near-term recession, and as such, we are maintaining a positive outlook.
Asset Class Performance Over the Last Twelve Months:
CASH
- Yields on cash assets continued to move higher in 2018. The increased action by the Fed is slowly causing short-term cash yields to move higher.
- At the end of the June 2017, the 13-week T-Bill was yielding 1.06%, and a year later, yields nearly doubled to 1.93%.
BONDS
- Over the last year, yields have risen as the Fed continues to reduce their balance sheet.
- Short-term bonds were up slightly for the second quarter, while longer-term bonds declined. Over the last twelve months, the US Treasury Short Bond Index was up 1.31%, while the longer-term US Treasury 20+ Year Bond Index was at a break-even 0.10%.
- Foreign bonds (Bloomberg Barclays Global Agg ex-US) turned in a 3.3% return over the last twelve months. The global bond market returns are holding well considering the global economies slow resurgence.
STOCKS (see chart above):
- All equity categories turned in positive returns except for Precious Metals.
- The Dow Jones Industrial Average was up 16.3% for the last year and was up a modest 1.3% for the latest quarter. The more broadly-based S&P 500 Index was down slightly in the first quarter ending in March but bounced back 3.4% in the second quarter 2018. Over the last twelve months, the S&P 500 Index was up 14.4%.
- International equities (as measured by the MSCI EAFE Index) were down -1.2% for the most recent quarter but made a modest gain over the last year of 6.8%. European equities (MSCI Europe) turned in similar returns, with an increase of 5.9% over the last year. The Pacific Rim markets were positive with Japan (MSCI Japan) up 10.9%, while Asian stocks (MSCI Asia-Pacific ex Japan) posted an 8.8% return over the last year.
- Domestic utilities (which are interest-rate sensitive) provided a small 2.3% return (MSCI USA Utility Index) over the last year.
- Technology was the top sector with an outstanding 26.5% return (MSCI – ACWI Information Technology – a global index) for the last twelve months.
- Energy stocks turned in a 25.0% return (MSCI ACWI Energy Index) for the last year as oil prices continued to move higher.
12-24 Month Outlook:
- In June, U.S. Leading Economic Indicators increased 0.5% following no change in May. The Leading Indicators are a useful guide for economic growth in the future. The Coincident and Lagging indicators both increased 0.3% for the month of June.
- The U.S. GDP (Gross Domestic Product) increased at an annual rate of 2.0% in the first quarter of 2018. The next release will be on July 27th and is expected to be around 4.0% for the second quarter 2018.
- We expect the global economy to have strong GDP growth which is unchanged from our last commentary. The IMF (International Monetary Fund) forecasts global GDP growth rate to be 3.9% in 2018 and 2019 while they expect a 2.5% growth rate for developed economies. Notwithstanding, some of the growth projections have been revised downward reflecting negative surprises in early 2018.
- Inflation continues to rise with the domestic CPI (Consumer Price Index) increasing to 2.9% in March 2018. The component in the CPI with the largest increase was energy.
- The Fed is committed to reducing their balance sheet. The result of that reduction is a steady increase in the Fed Funds interest rate as they reduce their holdings.
- The Tax Cuts and Jobs Act of 2017 has provided a significant improvement in corporate earnings. Some estimates indicate a 20% improvement in profits in the S&P 500 stocks over the last year.
- The unemployment rate was 3.9% domestically in May, the lowest rate since 2000. Globally, employment has been improving and is expected to remain relatively stable for the near term.
Investment Strategy Moving Forward:
- CASH – The Fed will continue to raise rates for the foreseeable future to reduce their balance sheet. We believe cash / money market funds will begin paying out rates above 1.5%. Notwithstanding, yields on many savings and money funds are still well below 1.0%. For now, our cash allocations will remain low.
- BONDS – We will avoid long-term bonds as rates continue to rise. As such, the bonds in the portfolios will have a short-duration. International bonds should do well as central banks will need to refrain from raising rates to protect their fragile economies.
- 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 is our largest asset class and should benefit most from the domestic economic improvement.
- European stocks are still attractive for the long-term as their valuations are cheaper than the U.S. markets. The European economy is facing headwinds as the ECB is cautiously reducing monetary stimulus.
- Asian growth continues to improve, but there are concerns of a trade conflict.
- With the increasing inflation rate, we believe the commodity-based asset classes (Energy and Precious Metals) should have good growth potential.
- Lastly, Technology based equities should do well in an improving economic environment.
While our overall perception of the markets is positive, but there are some headwinds in the near-term. On the plus side, we have continued earnings growth, and the improved tax policy should bode well for domestic companies. In addition, with unemployment at low levels, the consumer will add to overall growth in the economy. Against those positives, there are some headwinds that are beginning to impinge on the markets. The most notable headwind is the Fed increasing interest rates. Additionally, there is also fear of a trade war which could dampen GDP with the increased protectionist policies. At this point in the economic cycle, we expect continued global growth with low-to-slightly higher inflation. This 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!
