It is reported that Halloween is the second most commercial American holiday of the year.  There is even an urban legend that the candy industry went to Congress to rally behind extending Daylight Saving Time to the beginning of November.  The additional light would give the kids more time to collect candy and more candy would lead to more sales.

I am Dracula, bla, bla, bla.  Vlad III was known as Vlad the Impaler or Vlad Dracula and this guy was a brutal ruler known for cruel and unusual punishments.  His name inspired Bram Stoker’s novel Dracula, but he was not known for having fangs.  Bram Stoker was the one that decided to add fangs to his Dracula character.  Fangs, as you know, are for biting and tearing flesh or extracting blood for Dracula.

Today’s market, FAANGs mean something completely different.  FAANGs today would be defined as; Facebook, Apple, Amazon, Netflix and Google.  These stocks do not tear flesh or extract blood (at least not figuratively) but they have dominated major indexes, much like Vlad.

The S&P 500 has made new highs, but one could argue that the major push up was from a few select stocks.  In fact, as of 9/19/17 only 57 stocks in the S&P 500 had made new highs versus 12 that actually made new lows.  The 57 represent 11% of the S&P 500 which is in line with the percentage of the overall S&P that the five FAANGs represent.

Markets

The broad US markets posted positive returns for the quarter, but underperformed both the international and emerging markets.  Large company stocks have outperformed this year, aided by the falling dollar, much like their international counterparts.  A falling dollar provides a boost for multinational companies, but in general, smaller stocks receive their earnings domestically so a declining dollar does not provide the same boost.

World Market Performance

MSCI All Country Index with Selected Headlines from Q3 2017

As you will see below most of the headlines were positive.  Schwab reports that, so far this year we have only seen 5% of trading days with a move in the S&P 500 of greater than +/- 1%.  It is also the first time in many years that there has not been one day this year that has moved +/- 2%.  Much like Dracula, volatility has not come out to see the light.

World Asset Classes – Third Quarter 2017 Index Returns (%)

Shown below is the outperformance by the emerging and international markets.  Economies are getting stronger internationally, but index returns have been stoked by the declining dollar.

Fixed Income

Interest rates increased mildly across the US fixed income markets for the quarter.  As you will see the curve is pretty flat meaning that after 7 – 10 years there is not much yield pickup.  Why buy a 30-year bond when you only receive a marginal increase in yield.  Meanwhile a December Fed rate hike is still on the table as we have seen a slight uptick in inflation.  As we mentioned last month the Fed is starting to unwind its massive balance sheet.

Economy

The second quarter gross domestic product (GDP) was revised up to 3.1%, which is encouraging.  Expect disruption in the third quarter numbers after the recent hurricane season.  The rebuilding could cause a temporary jump in the numbers following slower numbers from August and September.  We received the non-farm payroll numbers on October 6^th.  The report was expected to show 80,000 new jobs added, instead we lost 33,000.  The effects of the hurricane are already showing up in the employment numbers.  The interesting part of the report showed that not only did the unemployment rate drop, but the underemployment rate dropped and the participation rate ticked up.  That could the mean that labor market is continuing to tighten and that tightening could lead to inflation.  Time to get out the garlic as we could see inflation emerge.  Stay tuned.

A look ahead

We just came off of a positive September, which is important as September holds the title as the worst performing month (usually).  Generally, a strong September leads to a good October, which by the way is the second worst month.  The good news for the final quarter is that November and December are the second and third best performing months. Market participants will be watching as there is a lot of retail sales and shopping that should take place this quarter.  We will get a good feel of the consumer as we head into November.  The final quarter is also a time for money managers to purchase and dispose of positions.  Time to sell losers to take advantage of loss write offs and time to sell winners to boost performance.  Overall we expect to end the year on a positive note and we do not anticipate any bloodletting.  We hope you all enjoy your Halloween and the cooler temperatures as we head into winter.

Spinnaker is pleased to introduce Rob Chase

Rob will be our Marketing Representative at Spinnaker.  In this role, he will assist businesses and individuals with customized investment management, retirement planning, and insurance strategies.

Rob began his career focused on long term care insurance planning before transitioning into his current role with Spinnaker. He is long term care partnership certified with licenses in insurance and real estate.

I am happy to say that he is a graduate of the University of Southern California with a dual degree in business and accounting.  Fight on!!!

Rob is an avid golfer and in his free time, he loves to be active with his two border collie dogs, Dash and Violet.

Sincerely,

Morgan R. Christen, CFA, CFP^®, MBA
Chief Executive Officer

Disclosures
* Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: US Stock Market (Russell 3000 Index), International Developed Stocks (MSCI World ex USA Index [net div.]), Emerging Markets (MSCI Emerging Markets Index [net div.]), Global Real Estate (S&P Global REIT Index), US Bond Market (Barclays US Aggregate Bond Index), and Global Bond ex US Market (Citigroup WGBI ex USA 1−30 Years [Hedged to USD]). The S&P data are provided by Standard & Poor’s Index Services Group. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. MSCI data © MSCI 2016, all rights reserved. Barclays data provided by Barclays Bank PLC. Citigroup bond indices © 2016 by Citigroup.

The S&P 500 Index is a free-float market capitalization weighted index of 500 of the largest US companies. This index is calculated on a total return basis with dividends reinvested and is not available for direct investment. Charts from Dimensional Fund Advisors. Inflation is typically defined as the change in the non-seasonally adjusted, all-items Consumer Price Index (CPI) for all urban consumers. CPI data are available from the US Bureau of Labor Statistics. Stock is the capital raised by a corporation through the issue of shares entitling holders to an ownership interest of the corporation. Treasury securities are negotiable debt issued by the United States Department of the Treasury. They are backed by the government’s full faith and credit and are exempt from state and local taxes. The indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is no guarantee of future results, and there is always the risk that an investor may lose money. Diversification neither assures a profit nor guarantees against loss in a declining market. The information contained herein is based on internal research derived from various sources and does not purport to be statements of all material facts relating to the securities mentioned. The information contained herein, while not guaranteed as to the accuracy or completeness, has been obtained from sources we believe to be reliable. Opinions expressed herein are subject to change without notice.