April 13, 2017
Quarter in Brief
In the first quarter, the market rally that began in the previous quarter continued with the Dow Jones Industrial Average topping 20,000 for the first time. In response to accelerating economic conditions and signs of strengthening inflation pressure, the Federal Reserve raised the federal funds rate by an additional quarter of a point. Consumer confidence is high and new home sales improved while sales of existing homes have slowed.
Domestic Economic Health
Demand for factory orders and services expanded nicely during the first quarter according to the Institute for Supply Management. All of the indices were positive and representative of solid growth. An additional sign of growth is that the core CPI has risen by 2.1% in a year. Unfortunately, consumer spending lagged behind these indicators throughout the opening quarter. Low unemployment of 4.7% and monthly employment gains exceeding 235,000 new hires were additional signs of a healthy domestic economy. The combination of all this domestic economic data convinced the Federal Reserve to make the first interest rate increase of the year hiking the federal funds rate by a quarter point and adjusting to a new target range to 0.75-1.00%.
Global Economic Health
The global economy continued solid growth in the quarter with the MSCI World Index gaining by 5.9%. The United Kingdom began the formal process of the Brexit late in the quarter and the United States exited the Trans-Pacific Partnership. The effects of negotiations associated with these two significant events are expected to become evident later this year. It is hard to find a global stock index that declined in the first quarter. Of note is the reduction of Russia’s RTS, by -3.3% and Japan’s Nikkei 225 down by -1.1%.
The outlook for Q2 is the continuation of the economic strength shown in the opening quarter. While the stock markets continued to outperform, a bullish attitude still predominates on Wall Street. Much interest will be focused on whether the Q1 earnings reports will provide the lift needed to take the stock markets to even higher levels this year.
With this bull market having exceeded analyst projections for 2017 already in March, Fortune magazine reports that the new consensus is for 2017 to have gains in a range between 4 –10%.
This solid positive economic news may create a desire to venture into higher risk asset classes, however, we at UPAL continue to advocate for making investment decisions based on long established goals and against making drastic movements based on current events and inconsistent with these goals. It is prudent to think about your risk tolerance in light of the market performance over the past twelve to eighteen months and the forward looking market and economic indicators. However this must be viewed in the context of your estimated retirement horizon. Adjusting your portfolio to be in keeping with these factors may be in order.
Diversification of your portfolio is the primary tool for managing risk and this is also a good time for reassessing if your investments are at an acceptable level. We at UPAL are eager to help guide you through this process and encourage you to contact us to schedule a review of your portfolio.