The Intelligent Investor
A bi-weekly publication from Consultiva Internacional, Inc. (Registered Investment Adviser) December 15, 2016
From the Executive Desk
The U.S. November jobs report seems to have marked a turning point in the economy after a 9 year recession and recovery period. The unemployment rate fell to 4.6% and employers added another 178,000 jobs. The last time it was this low was August 2007 (see graph I below), a date that is clearly pre-recession. These figures are consistent with what economists consider full employment, and after sell-off that began with Trump’s victory in the elections, bond markets are now priced to reflect a return to more normal interest rates. This seems to have primed the Federal Reserve who will most likely raise interest rates when the policy committee meets this week. However, a recent New York Times article suggests reading between the lines, as the jobs numbers are more uneven than the drop in the unemployment rate would suggest. Part of the decline was caused by 226,000 people dropping out of the labor force, people who are neither working nor looking for work, a lingering weak spot in the United States economy. The combination of a low unemployment rate and a shrinking labor force implies that the economy will inevitably stutter, because to keep employment gains at that pace, more people would have to join the work force. The pool of officially unemployed is down to 7.4 million, the lowest since November 2007. To keep up that speedy job growth, employers will need to pull in people who don’t fit the definition of unemployed (those who say they want a job and have been actively looking for one) but who are able and willing to work, this includes immigrant workers or those who have been generating income through informal sectors of the economy. The incoming administration seems to be inheriting an economy largely healed from its trauma of the last nine years, and they will have most indicators pointing in the right direction. However, immigration, domestic business development, and labor policies will be hot issues in the next chapter of U.S. economic history. Hopefully it will be more boring than the last.
Myrna Rivera, CIMA®
Founder & Chief Executive Officer
Global economies are still shaking and markets have been changing dramatically in November and into December as anticipation and speculation have reigned during this post-election period. The dollar has broadly strengthened and domestic equities have outperformed international equities, with Latin American equities and currencies among the most negatively affected. Some of the underperformance can be attributed to investor reaction to what they perceive will be a shift towards protectionist trade policies in the U.S. Conversely, domestic equity markets surged in November and have kept their momentum through mid-December, as investors anticipate an injection of polices and capital that would spur economic growth in Trump’s America. Markets were volatile leading up to the election, amid uncertainty about the outcome of the race. Prior to the election, many market analysts had speculated that if Mr. Trump won, the equity markets would drop, as his election would represent a change in the status quo. Investors also gained greater clarity on the likelihood that the Federal Open Market Committee (FOMC) would raise the fed funds rate at its December meeting, an outcome also anticipated by the futures market, which has been implying a 100% probability of a rate hike since the end of November.
(As of December 13, 2016)
CPI: +1.6% Chg. from yr. ago
Unemployment Rate: 4.6%
GDP: 3.2% Comp. Annual rate of Chg. on 2016:Q3
Ind.Prod.Index: +0.0% change from previous month
Source: St. Louis Fed. Res.
CPI: 0.5% Chg. from yr. ago
Unemployment Rate: 9.8%
GDP: 0.3%, Comp. Annual rate of Chg. on 2016:Q3
Ind.Prod.Index: -0.8% change from previous month
Source: Moody’s Analytics
CPI: -0.4% Chg. from yr. ago
Unemployment Rate: 3%
GDP: 0.3%, Comp. Annual rate of Chg. on 2016:Q3
Ind.Prod.Index: 0.1% change from previous month
Source: Moody’s Analytics
CPI: 0.3% Chg. from yr. ago
Unemployment Rate: 12.1%
Payroll Employment: -0.6 Chg. from yr. ago
GDB Econ. Act. Index: -1.0% Chg. from yr. ago
Source: P.R. GDB
Stocks: Broad U.S. market indices were mostly higher during the month of November. The S&P 500 gained +3.7%, and is now up +9.8% year-to-date. The Dow Jones Industrial Average (DJIA) also advanced, delivering a gain of +5.9% for the month. The tech-heavy Nasdaq Composite Index rose by +2.8%, and is now up +7.6% so far year-to-date. The Russell 2000 Index (+11.2%) of small cap stocks significantly outperformed the Russell 1000 Index (+3.9%) of large cap stocks. Non-U.S. equity markets were generally lower in November. The MSCI All Country World ex-U.S. Index declined by -2.3% for the month, and is now up +1.9% year-to-date through November. The MSCI EAFE Index, which measures developed markets performance, declined -2.0%, and is now down -2.3% year-to-date.
Bonds: Performance of U.S. broad-based fixed income indices suffered in November, with the Bloomberg (Barclays) U.S. Aggregate Bond Index declining -2.4% for the month. Non-U.S. fixed income markets performed worse, with the Bloomberg (Barclays) Global Aggregate ex-U.S. Index dropping -5.3%. Municipals performed poorly, declining by -3.7%. Intermediate-term corporate bonds also fell, as the Bloomberg (Barclays) U.S. Corporate 5-10 Year Index declined by -2.9%. Utilities (-3.6%) were the worst performing credit subsector during the month due to their longer duration profile.
Alternatives: Commodities were higher, posting a gain of +1.3%, and REITs declined -1.7% in sympathy with the rise in interest rates. For more information see Table 1 below.
Evangeline Dávila, CIMA®
Chief Research & Investment Officer
Source: Callan Associates, Inc.
U.S. equities declined in October amid a confluence of corporate, central bank, and geo-political forces. U.S. Treasuries experienced their worst month so far in 2016 as improving economic data increased concerns over a rise in the federal funds rate. Amid an uncertain scenario, were downside risks are combined with expectations of muted returns, we continue to recommend prudent asset allocation and risk assessment, based on future capital needs, for plan sponsors, institutions and individual investors. Due diligence reviews and an adherence to a well-developed investment policy remain the most prudent course for long-term investors. Continued fiduciary education is paramount.
Consultiva Internacional Inc. (“Consultiva”) has compiled the information for this report from sources Consultiva believes to be reliable. Sources include: investment manager(s); mutual fund(s); exchange traded fund(s); third party data vendors and other outside sources. Consultiva assumes no responsibility for the accuracy, reliability, completeness or timeliness of the information provided, or methodologies employed, by any information providers external to Consultiva. Conclusions reflect the judgement of Consultiva Investment Strategy Committee at this time and is subject to change without prior notice. There also can be no guarantee that using this information will lead to any particular result. Past performance results are not necessarily indicative of future performance. Diversification does not guarantee a profit or protection against loss. This document is for informational purposes only and is not intended to be an offer, solicitation, recommendation with respect to the purchase or sale of any financial investment/ security or a recommendation of the services supplied by any money management organization neither an investment advice or legal opinion. Investment advice can be provided only after the delivery of Consultiva’s Brochure and Brochure Supplement (ADV Part 2A and 2B) once a properly executed investment advisory agreement has been entered into by a client and Consultiva. This is not a solicitation to become a client of Consultiva. There are risks involved with investing including the possible loss of principal. All investments are subject to risk. Investors should make investment decisions based on their specific investment objectives, risk tolerance and financial circumstances. The registration with the Securities and Exchange Commission does not imply a certain level of skill or training.