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Market Perspective April 2017

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Below please find a link to our monthly market perspective piece for December. This month we explore a variety of factors potentially driving markets and evaluate the risks and rewards lying beneath the surface.

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Market Perspective April 2017

  1. 1. Market Perspective – April 2017 Experience Insight Impact Overview: With markets continuing an upward march beyond the first quarter, many investors wonder what has caused the surge. They also question what risks market participants face. This month we focus on how a confluence of factors such as earnings growth, policy change (potential), economic data, and central banks may be influencing markets in the short-term. 1
  2. 2. Earnings Growth Experience Insight Impact 2 • After several years of shrinking earnings, S&P 500 companies have finally clawed their way back towards positive growth. • This growth is expected to continue throughout the year, although we have already seen negative revisions. • A significant portion of year over year growth stems from a rebound in energy and commodity prices. • The U.S. dollar has also been a headwind in recent years, a factor that has begun reversing modestly.
  3. 3. Policy Change Experience Insight Impact 3 In the past, we have discussed the “big three” areas of policy change which could serve as positive market catalysts. • Tax Reform: A lowering of the corporate rate, a repatriation “holiday” (or rate reduction), and personal tax reform could stimulate the economy (and accordingly the markets) by hundreds of billions of dollars (or more) over time. Given the fractured Republican congress, as demonstrated in the failure to repeal Obamacare, achieving tax reform in a “revenue neutral” manner reduces the likelihood of a significant reform. • Deregulation: Most companies and analysts believe the cost of the high level of regulation in various industries is burdensome, and we believe this can be greatly improved. The impact is highly uncertain, although directionally a positive. • Infrastructure: An infrastructure stimulus-type plan has a reasonable chance of occurring and the impact should be positive. However, in the past, projects can take several years (at a minimum) to implement and the impact is felt over even longer periods of time. SUMMARY: At this time, it appears the market is “baking in” at least some of these agenda items and may be ahead of the reality.
  4. 4. Economic Data: GDP Experience Insight Impact 4 • GDP is a coincident indicator. The measure of economic output resonates with the current status of the economy. • Real GDP growth rate has bounced off the recent lows, but remains sluggish relative to historical averages. • Q4 2016 GDP growth equaled 2.1% (seasonally adjusted annual rate) and the consensus estimate for Q1 2017 is substantially lower (currently 1.3%), implying continued subpar growth. • Full year 2017 estimate is closer to 2%, which remains below average. Average
  5. 5. Central Bank Activity Experience Insight Impact 5 • Central Banks around the globe have begun the process of tapering off extreme accommodative policy, and in some cases are reversing such policy (for example, the U.S. Federal Reserve raising interest rates). Nonetheless, global central bank assets continue to expand albeit at a slower rate. • Much of the growth coincides with accommodative monetary policy and a concern exists for what will happen to liquidity once policy tightens modestly. The BOJ’s assets are approaching 100% of GDP. • The impacts of monetary policy changes typically occur with significant lag, often up to a year or more. Central Bank Assets / GDP Switzerland Japan Europe U.S.
  6. 6. Examples of Other Notable Risks Experience Insight Impact 6 Geopolitical Risks Anti-Growth Policies Expensive Valuation Congressional Dysfunction North Korea, populist movements, European disintegration, hostility with Russia, etc. Not all of Trump’s proposed policies are market friendly. Trump’s market-friendly agendas (e.g. tax reform) may not fully materialize. Shiller CAPE
  7. 7. Conclusion: Part of being an investor is accepting market risk and volatility as a trade-off to higher returns. The past six months have witnessed very little volatility, while risks appear to be mounting (even leaving valuations out of this discussion). Weighing the positives and negatives of the investing environment is critical to long-term success. At the same time, a flexible approach towards portfolio management with a long-term focus remains our preferred strategy in a world with rapid change and ongoing risks. Experience Insight Impact Market Perspective – April 2017 7
  8. 8. Experience Insight Impact Disclaimer Opinions expressed in this commentary may change as conditions warrant and is for informational purposes only. Information contained herein is not intended to be personal investment advice for any specific person for any particular purpose. We utilize information sources that we believe to be reliable but cannot guarantee the accuracy of those sources. Past performance is no guarantee of future performance; investing involves risk and may result in loss of capital. Consider seeking advice from a professional before implementing any investing strategy. 8

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