The Intelligent Investor
A bi-weekly publication from Consultiva Internacional, Inc. (Registered Investment Adviser) June 12, 2017
Myrna Rivera, CIMA®
Many of us “market-watchers” continue to be amazed at the current stock run. As seen below, the Dow Jones has continued to set record numbers over the past six months, and added 136 points on June 1st, its first record close since March 1. While many of us were worried about President Trump’s decision to withdraw from the climate deal and its long-term implications for future cash flows, Wall Street analysts would rather link present values to current economic signals, which in the U.S seem very healthy. Investors felt positive about the latest ADP job report which showed an additional 253,000 private sector jobs in May. This strong reading dispelled earlier concerns of a slowdown in the economy after a flat first quarter for productivity. The U.S. Labor Department recently reported zero productivity growth between January and March, after a 1.8% increase in the fourth quarter of 2016. It had been the weakest performance since productivity had fallen at a 0.1% rate in the second quarter of last year, but it was an improvement over the initial reading of a 0.6% decline. Productivity, the amount of output per hour of work, has been weak through most of the current recovery, averaging 1.2% per quarter. Many analysts believe finding a way to boost productivity growth is the biggest economic challenge facing the U.S., but there is no consensus yet on how Trump’s policies affecting trade, manufacturing and the labor force will play out. Productivity is key because it results in increased output for each hour of work and this can allow employers to boost wages without triggering higher inflation. Greater wages results in higher consumption, and has a positive effect on developed economies. However, even if productivity remains low, solid new job numbers will probably clear the way for the Federal Reserve to raise interest rates this summer, the second of three hikes expected this year. This will reassure investors that corporate profits can continue to grow, even in light of higher inflation and low productivity, and the Dow and other stock indices will likely continue their run. However, in the long-term, economic growth is a combination of increases in the labor force and growth in productivity. Without both President Trump will have a hard time achieving his goal of boosting overall growth from the weak 2.1% average seen since the recession to the minimum of 4% promised during his campaign.
Edmundo J. Garza
The way markets are behaving, one would have to conclude that investors remain staunchly resilient, or that they have become terribly complacent with how the global economy is performing. Amidst opposing positions in global politics, terrorism in Europe and the Middle East, a missile launch in North Korea and one anti-missile test from the U.S., the S&P 500 posted seven new closing highs in May. Backing this notion of an impervious market, there was absolutely no fear in the official VIX® equity market “fear gauge”, as it traded at a low of 9.56, a level not seen since December 2006 (9.39), compared to October 2008’s 89.53 high, August 2015’s 53.89 high, or even the 23.01 election high in November 2016. There was a brief dip in optimism amid President Donald Trump removal of FBI Director James Comey, powering fears that this action could result in further Congressional holdup and slow the potential fiscal reforms. However, the market eventually sifted out this noise and gave greater weight to positive developments. Although the Federal Open Market Committee took no action at its May meeting and left interest rates unchanged, meeting minutes indicate that a June increase is likely, with traders pricing in over a 90% likelihood of a 25bps increase. However, in support of a growing U.S. economy, the second estimate of first-quarter GDP of +1.2% was better than the initial assessment of 0.7%, and consumer spending, the largest part of the U.S. economy, was revised higher to +0.6%, which was double the +0.3% pace in the advance reading.
(As of June 11, 2017)
CPI: 2.2% Chg. from yr. ago
CPI: 1.9% Chg. from yr. ago
CPI: 0.3% Chg. from yr. ago
CPI: 0.1% Chg. from yr. ago
Evangeline Dávila, CIMA®
Stocks: U.S. equities were mostly higher during May. The S&P 500 gained +1.4%, pushing its year-to-date (YTD) return to +8.7%, while larger gains were seen in the tech-heavy NASDAQ Composite, which advanced +2.7%, and is now up +15.7% YTD. Small cap underperformed large cap stocks, and growth stocks outperformed value stocks. In terms of sector performance, the top performers were Information Technology and Utilities, with returns of +4.4% and +5.1%, respectively. International equities mostly outperformed their domestic peers last month, following the French election victory of Emmanuel Macron over Marine Le Pen, which improved economic sentiment in Europe and the future of the European Union (EU). Emerging markets posted strong results, with a gain of +3.0% on the MSCI Emerging Markets (EM) Index, which is now up +17.3% YTD. Regionally, Europe and Asia were the best relative performers, while Eastern Europe and Latin America were the poorest.
Bonds: Most fixed income markets posted gains during the month. Investors flocked to treasuries mid-month, leading to yield contraction amid concerns that the Fed intends to raise rates. Broad-based fixed income posted gains, with the Bloomberg-Barclays U.S. Aggregate Bond Index increasing +0.8% for the month. Global fixed income markets performed slightly better, as the Bloomberg-Barclays Global Aggregate ex-U.S. Index gained +2.2%. The Bloomberg-Barclays U.S. Corporate High Yield Index increased by +0.9% and is now up +4.8% YTD. Municipals posted a gain of +1.6% during the month and are up 3.9% YTD.
Alternatives:Commodity prices declined by -1.3%, while REITs were down slightly, at -0.6%. Unimpressive results in the hedge fund sector, coupled with impatient investors who are not finding a justification for higher fees, has resulted in a net outflow of these investments. The HFRX Global Hedge Fund Index rose by 0.2% and is at 2.3% for the year as of May 31, 2017.
When evaluating domestic stock mutual funds, you’ve likely run across two labels that may be confusing: Growth Funds and Value Funds. Both types of funds seek to provide the best possible returns, but they differ in the approach they take, the way they pick stocks, and the types of markets for which they are best suited. Growth funds focus on companies that managers believe will experience faster than average growth as measured by revenues, earnings, or cash flow. Growth fund managers also look carefully at the way a company manages its business. For instance, many growth-oriented companies are more likely to reinvest profits in expansion projects or acquisitions, rather than use them to pay out dividends to shareholders. Meanwhile, the goal of value funds is to find companies whose stock prices don’t necessarily reflect their fundamental worth. The reasons for these stocks being undervalued can vary: a company or industry can fall on hard times, a poor quarterly earnings report may cause concerns, or some external event can depress the stock price and create a longer-term buying opportunity. In general, value funds focus on perceived safety rather than growth, often investing in mature companies that are primarily using their earnings to pay dividends. As a result, value funds tend to produce more current income than growth funds, and they also offer the potential for long-term appreciation if the true value of the stocks they invest in is recognized.
Quite a few political events happened in May: President Trump firing the head of the FBI. Tensions continuing to rise in the Korean peninsula. The second round of the French presidential election saw the centrist candidate, Emmanuel Macron, win. Results were seen as supportive of the Euro, which had been threatened by elections elsewhere, and indicated that France would stay at the heart of the European Union. However, concern remain as to the effectiveness of the country’s new president as a third electoral round for legislative seats is next. Amid an uncertain scenario 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 is a Registered Investment Adviser. The registration with the Securities and Exchange Commission does not imply a certain level of skill or training. 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. Global and international investments may carry additional risks that are generally not associated with U.S. investments, such as currency fluctuations, political instability, economic conditions and varying accounting standards. Annual, cumulative, and annualized total returns are calculated assuming reinvestment of dividends and income plus capital appreciation.