Investor Intelligence Aug 25, 2018

                                                                                                                                                                  Myrna Rivera, CIMA®

U.S. equities have been boosted by strong corporate earnings and solid economic growth these past weeks. The S&P 500 hit an all-time high last week and tied the record for the longest bull market ever. The broad index rose 0.2 percent and reached an intraday record of 2,873.23, led by consumer discretionary and industrial. Investors seem to be betting on a strengthening economy and booming corporate profits, despite recent trade battles. The bull market turned 3,453 days old on the 23rd of August, and became the longest on record by most definitions. The S&P 500 has risen more than 300 percent since hitting its financial crisis bottom on March 9, 2009. For the year, the index is up more than 7 percent and since the start of 2017 (see below), the S&P 500 has risen more than 25 percent. The Dow Jones Industrial Average gained 63.6 points to close at 25,822.29, just 3 percent below a record high, with Intel and Goldman Sachs leading the index. The Nasdaq Composite outperformed, rising 0.5 percent to 7,859.17 as Micron and Netflix rose. The Russell 2000, which is made up of small cap stocks, also reached a record high. Strong corporate earnings, coupled with solid economic growth, has offset worries over tariffs and trade, particularly between the U.S. and China. However, we remain cautious of these and other global economy events.

Edmundo J. Garza

Theminutes of the most recent Federal Open Market Committee meetingwere released last week. Federal Reserve officials continue to see a strong U.S. economic and expressed confidence in forecasting “strong” economic growth over the near term. However, ongoing global trade tensions continues to be a threat, and large-scale and prolonged disputes over trade policies could have an adverse effect on business sentiment, investment spending, and employment. Tariffs are generally considered inflationary as they add to costs for imports. Fed officials pointed that businesses have not yet cut back on investment and spending. That could change if trade issues are not resolved in a timely matter. Members at the meeting declined to vote on raising the federal funds rate from its current range of 1.75% to 2%, but officials said it would “likely soon be appropriate to take another step in removing policy accommodation”. This supports a widely anticipated hike at the September meeting and possibly one more in December. On inflation, members noted that the current trend is in line with their inflation goal. Various industry districts indicated that firms are feeling more comfortable hiking wages, though non-compensation benefits have been on the rise as well.

United States:

CPI: 2.9% Chg. from yr. ago

Unemployment Rate: 3.9%

GDP: 4.1% Comp. Annual rate of Chg. on 2018:Q2

Ind.Prod.Index: +0.1% change from previous month
Source: St. Louis Fed. Res. 

Japan:

CPI: 0.7% Chg. from yr. ago

Unemployment Rate: 2.4%

GDP: 0.5%, Comp. Annual rate of Chg. on 2018:Q2

Ind.Prod.Index: -2.1% change from previous month

Source: Moody’s Analytics 

Eurozone:

CPI: 1.9% Chg. from yr. ago

Unemployment Rate: 8.3%

GDP: 0.4%, Comp. Annual rate of Chg. on 2018:Q1

Ind.Prod.Index: -0.7% change from previous month

Source: Moody’s Analytics 

Puerto Rico:

CPI: 0.0% Chg. from yr. ago

Unemployment Rate: 9.3%

Payroll Employment: -4.0% Chg. from yr. ago

GDB Econ. Act. Index: -7.9% Chg. from yr. ago

Source: Economic Development Bank of Puerto Rico

Evangeline Dávila, CIMA®

Stocks:        Non-U.S. equity markets posted weaker results when compared with their U.S. large cap counterparts, with the MSCI ACWI ex-U.S. Index returning 2.4% for the month of July. The International Monetary Fund reported real global GDP growth of 3.64% for the first quarter, and the ECB forecasts real GDP growth to hit 2.4% for 2018. International developed equities and emerging markets equities posted similar returns for the month, with the MSCI EAFE Index up 2.5% and the MSCI EM Index 2.2%.

Bonds:         The Bloomberg U.S. Aggregate Bond Index was relatively flat in July (+0.02%) with the Bloomberg Corporate Bond Index (investment-grade) contributing 80 basis points for the month. Non-U.S. fixed income struggled relative to U.S. fixed income, as the Bloomberg Global Aggregate ex-U.S. Index lost 0.4%, but emerging markets debt was the best-performing asset class within fixed income, returning 2.6%.

Alternatives: The Bloomberg Commodity Index and the energy-heavy S&P-Goldman Sachs Commodity Index incurred a loss of 2.1% and 3.5%, respectively. Meanwhile, the FTSE-NAREIT Equity REIT Index posted a gain of 0.8%. Non-U.S. REITs outperformed U.S. with the FTSE EP/NA Global ex-U.S. gaining 1.1%. Hedge strategies posted gains in July, recovering from the narrow decline from June, and effectively navigating a primarily positive earnings season. The HFRI Fund Weighted Composite Index advanced 0.6% for the month, with contributions from equity, credit, M&A and currency exposures.

What to Do?

While July provided a positive start to the second half of 2018, the environment and general mood in the market remains cautious. Continuing tension between the U.S. and its key global trade partners (Eurozone and China chief among them) is still a significant concern. The pace of rises in domestic interest rates and inflation, equity volatility, changes in currency trends, and further policy normalization by global central banks continue to worry markets. Amid an uncertain scenariowe 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.