The world is flat
Quarter one of 2017 is now over and it is time to talk about what worked. Before we talk about markets we need a quick science lesson. As you may have heard, retired NBA star Shaquille O’Neal informed us that the earth is flat. He said “It’s true. The Earth is flat…I drive from Florida to California all the time, and it’s flat to me.” Being that he is driving from one coast to another, Shaq Diesel should take time to sit on a beach and look at the distant horizon, where he will see ships appearing. They are actually not emerging from the depths, but rather they are appearing, because the world is…round. A great example of that effect is, an Ant Walking on an Orange, shown below.
Inflation is no longer flat
The Federal Reserve bumped rates by another quarter percent and they anticipate two more moves before the end of the year. Inflation has raised its head as you will see below. After over six years of moving in a normal sinus rhythm, the economy showed a spike. The Fed has a two-pronged approach when deciding to raise or lower rates; inflation and unemployment. The latest news on inflation and employment has prompted the Fed to start normalizing interest rates (raise them).
While not a perfect gauge, you will see below that Disney World ticket prices have loosely tracked inflation (per the National Inflation Association). So for all of you parents and grandparents, time to get your ticket orders in as you may see prices go even higher than current levels (and that is not cheap).
The broad US equity markets recorded mostly positive returns. Larger companies led the move with smaller companies lagging a bit. We saw a lot in the quarter; the Dow closed above 20,000 for the first time, housing starts had their best year since 2007, the Fed raised rates and Britain set the Brexit process in motion.
In US dollar terms, international developed markets outperformed the US equity markets but they underperformed emerging markets during the quarter. Small companies outperformed large in both international developed and emerging markets.
Interest rates were mixed across the US fixed income market during the first quarter of 2017. The yield on the 5-year Treasury note was unchanged ending at 1.93%. The yield on the 1-year Treasury note decreased 5 basis points to 2.40%. The 30-year Treasury bond decreased 4 basis points to 3.2%
Industrial and precious metals were the top performers with aluminum gaining 15.21%, silver up 13.75% and gold climbed 8.06%. Energy was the worst performing sector with natural gas declining 17.15%, unleaded gas falling 12.31% and WTI crude oil dropping 9.11%.
I believe it was Pythagoras back in 500 BC that first talked about the earth being round. He is also the gentleman that is credited with the Pythagorean Theorem (above). So the earth is round, and the political realities with the failure to repeal the Affordable Care Act contributed to a mild pull back. An interesting note, while the pullback was mild on the surface, a larger correction occurred among some individual securities. According to Strategas Research Group, 24% of the S&P 500 has already experienced a correction of 10 – 20% from their 52 week highs, while another 14% are down more than 20%. This is one of the many reasons we diversify your portfolios. We want to capture the general market returns while not putting your portfolios at risk of concentration.
Investors are now looking toward the future and focusing on tax and regulatory reform. We believe there could be additional upside current market, although we are proceeding with caution. If the tax and regulatory reform fail, market participants will not be pleased. The beginning of Brexit will also introduce unknown territory with additional risks. We thank you for your continued support and we are pleased to be on your team.
Morgan R. Christen, CFA, CFP®, MBA
Chief Executive Officer
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 [net div.]), US Bond Market (Bloomberg Barclays US Aggregate Bond Index), and Global Bond ex US Market (Citi 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 2017, all rights reserved. Bloomberg Barclays data provided by Bloomberg. Citi fixed income indices copyright 2017 by Citigroup.. Market segment (index representation) as follows: Marketwide (Russell 3000 Index), Large Cap (Russell 1000 Index), Large Cap Value (Russell 1000 Value Index), Large Cap Growth (Russell 1000 Growth Index), Small Cap (Russell 2000 Index), Small Cap Value (Russell 2000 Value Index), and Small Cap Growth (Russell 2000 Growth Index). World Market Cap represented by Russell 3000 Index, MSCI World ex USA IMI Index, and MSCI Emerging Markets IMI Index. Russell 3000 Index is used as the proxy for the US market. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. MSCI data © MSCI 2017, all rights reserved. Market segment (index representation) as follows: Large Cap (MSCI World ex USA Index), Small Cap (MSCI World ex USA Small Cap Index), Value (MSCI World ex USA Value Index), and Growth (MSCI World ex USA Growth). All index returns are net of withholding tax on dividends. World Market Cap represented by Russell 3000 Index, MSCI World ex USA IMI Index, and MSCI Emerging Markets IMI Index. MSCI World ex USA IMI Index is used as the proxy for the International Developed market. MSCI data © MSCI 2017, all rights reserved. Market segment (index representation) as follows: Large Cap (MSCI Emerging Markets Index), Small Cap (MSCI Emerging Markets Small Cap Index), Value (MSCI Emerging Markets Value Index), and Growth (MSCI Emerging Markets Growth Index). All index returns are net of withholding tax on dividends. World Market Cap represented by Russell 3000 Index, MSCI World ex USA IMI Index, and MSCI Emerging Markets IMI Index. MSCI Emerging Markets IMI Index used as the proxy for the emerging market portion of the market. MSCI data © MSCI 2017, all rights reserved. All index returns are net of withholding tax on dividends. Securities and commodities data provided by Bloomberg. Yield curve data from Federal Reserve. State and local bonds are from the S&P National AMT-Free Municipal Bond Index. AAA-AA Corporates represent the Bank of America Merrill Lynch US Corporates, AA-AAA rated. A-BBB Corporates represent the Bank of America Merrill Lynch US Corporates, BBB-A rated. Bloomberg Barclays data provided by Bloomberg. US long-term bonds, bills, inflation, and fixed income factor data © Stocks, Bonds, Bills, and Inflation (SBBI) Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield). Citi fixed income indices copyright 2017 by Citigroup. The BofA Merrill Lynch Indices are used with permission; © 2017 Merrill Lynch, Pierce, Fenner & Smith Incorporated; all rights reserved. Merrill Lynch, Pierce, Fenner & Smith Incorporated is a wholly owned subsidiary of Bank of America Corporation. The S&P data are provided by Standard & Poor’s Index Services Group. Ant on an Orange http://www.popsci.com/10-ways-you-can-prove-earth-is-round#page-3 National inflation association inflation.us 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. Charles Schwab credited with the Strategas Research Group statistics. Information found in Liz Ann Sonders