The Pulse

The Pulse

The Pulse 10/05/2017


-Stocks continue their climb

-Dollar strengthens on tax, Fed policy

-Yields rise, bonds decline

Investors celebrated the past week as details of the White House tax proposal emerged and buoyed stock prices to new highs. Small-cap and technology stocks soared, jumping over 4% and 2% respectively, with the anticipated tax changes potentially providing outsized benefits in the form of relief to small businesses and repatriation of foreign cash for large tech firms such as Apple. While it is still premature to have any conviction that the proposals will pass in their current form, many believe some form of tax reduction is on the way.

Abroad, European equities faced a test to their upward trajectory as sentiment soured from the separatist movement in Catalonia, Spain. Locals turned out in droves to vote for secession from Spain, which was referred to as “illegal” from the national government. While stock markets took the news with muted response, it remains to be seen how the situation will be resolved.

Emerging markets remain robust, rebounding significantly from the recent weakness brought on primarily from dollar strength. Fundamentals remain positive and monetary policy accommodative in most emerging markets, as inflation stays absent. As the US and other developed markets see continued economic momentum, global markets that feed these consumption-based economies are likely to see outsized benefits.

The goldilocks scenario of low inflation, economic acceleration, and profit growth we now find ourselves in cannot last forever, but currently appears to be firmly intact. Volatility in markets reflects this reality, with record-low swings in equity prices as they continue their steady ascent higher. Complacency could be setting up investors for a jolt should volatility spike from actions in North Korea, disappointment from Washington, a massive cyberattack, or one of the many other significant risks facing the world economy. However, barring one these unpredictable events occurring, optimism in global growth persists and investors should stay bullish for now, while maintaining a balanced approach.


The Pulse 09/28/2017


-Bond yields climb on potential tax cuts, Fed decisions

-US stocks at all-time highs

-International equities weaken

September has seen significant events unfold in the form of hurricanes, central bank policy decisions, and some initial steps for tax policy change in Washington. While the US was mostly spared from hurricane Irma, Harvey will remain a drag on economic figures for several quarters to come. In a well-telegraphed decision from the Federal Reserve, Janet Yellen laid out the groundwork for the unwind of their $4.5 trillion dollar balance sheet, and affirmed their stance that rate rises will continue as planned. While markets had anticipated the balance sheet reductions, rate expectations rose dramatically, resulting in significantly higher yields and losses in bond prices. Adding to market volatility, tax “reform” appears to be moving forward, though the specifics of policy remain unclear. Most believe that current proposals will result in tax cuts for the middle class, as well as corporations, which could boost economic output in the short term through consumer spending and investment.

Internationally, emerging and developed markets appear to be taking a breather, despite fundamentals that continue to make the case for a longer-term expansion. We believe the recent market pullbacks can be attributed mostly to dollar dynamics, as the Federal Reserve’s decisions, strengthening oil prices, and tax cuts caused a reversal from the steady dollar decline year-to-date. We continue to remain bullish internationally, however, and have added to these positions during the recent dip. 

Looking forward, we believe the major market drivers through the end of the year will be the Federal Reserve’s December policy decision, progress on tax cuts, and continued strength in corporate earnings. Our base case is a December rate hike, a tax cut and repatriation of corporate dollars for investment, and muted earnings growth, which should translate into additional US market upside and potential for slightly higher yields. Long-term, it appears likely that yields will remain capped by low economic growth in the US and demand for US bonds from abroad, and that equity markets should continue their expansion, albeit at a slower pace.


The Pulse 09/08/2017


-North Korea, hurricanes rattle markets

-Central bankers leave rates unchanged

-Dollar continues to weaken

US markets ended August flat, with turmoil from North Korea, hurricane Harvey, and Washington drama continuing to plague the news feed and market participants looking to de-risk their portfolios. Hurricane Harvey will likely be one of the most-costly natural disasters in US history, incurring losses for major insurers and providing a boon for sectors involved in the clean-up effort. The storm will have significant effects on economic data over the coming quarters, skewing figures and making an already murky outlook even cloudier.

Adding to the unease, North Korea continues to test the resolve of the international community, firing ballistic missiles and advancing their nuclear weapon capabilities. While it appears no good options are on the table, it is likely that containment will remain the approach to the “hermit kingdom”. While Kim Jong Un’s rhetoric and actions are destabilizing, there is no indication that he is suicidal, and will likely take steps to avoid a guaranteed end of his dynasty from an all-out-war. Further sanctions and an increase in spending on defensive capabilities appear to be the most probable path forward.

On the economic front, monetary policymakers in the US avoided discussion of further tightening at their annual summit in Jackson Hole. Across the Atlantic, the European Central Bank provided no clarity on when the end of their quantitative easing program would come, and kept rates unchanged. Despite initial expectations for higher yields earlier in the year, stalled interest rate hikes and global demand for income lead yields to continue to fall, with bond prices increasing. While over the intermediate to long term we still expect yields to increase, it will likely be a slow, steady process.

Stocks in the US appear to be taking a breather from their steady climb, while emerging market stocks continue their rapid ascent, with a weak US dollar bolstering returns. From a valuation standpoint, US equities appear expensive based on some historical metrics, however, with earnings yields still well above the 10 year treasury rate, stocks remain the most attractive opportunity available at this time. As long as steady economic growth, low inflation, strong consumer spending, and expanding employment figures continue to roll in, markets should remain the place to be for the foreseeable future. 


The Pulse 08/21/2017


-Volatility returns in the wake of Charlottesville, European terrorism

-Political instability threatens pro-growth agenda

-Central bankers potentially ease call for monetary tightening

The weekend of August 12th sparked national controversy as white supremacists, neo-Nazis, and other fringe groups descended on Charlottesville, Virginia to oppose the removal of a statue of Robert E. Lee, resulting in an outburst of violence as counter-protesters clashed and one person was killed in what Attorney General Jeff Sessions described as “domestic terrorism”. 

The mixed responses from the Oval Office aggravated the already vitriolic situation, as sorely needed leadership went absent. Congressmen from both sides of the aisle were outspoken about the lack of reconciliation offered from the White House, adding to the turmoil. Further contributing to the furor, several surprise “staff changes” in the administration’s highest posts added to the uproar days later. Politics aside, the apparent anarchy within the Presidency continues to cast doubt on the likelihood of health care, tax, and regulatory reform, as well as the possibility for infrastructure spending. Markets reacted negatively, as the current lofty valuations rely at least partially on the implementation of these policies.

Geopolitical tension rose further with the horrific terrorist attacks in Barcelona, followed soon after by more attacks in Finland. Markets sold off in tandem, as investors appeared to finally be unnerved by the constant barrage of bad news. While it appears the economic recovery is firmly intact, market volatility will likely remain if tensions from North Korea, terrorism at home and abroad, and political infighting continue.

Aside from the never-ending drama of the daily news, comments from the Federal Reserve and European Central bank off of recent inflation data appeared to reflect a less hawkish tone in their near- term plans for monetary tightening. The expected uptick in inflation from an unemployment rate at record lows has yet to come, and policy makers are beginning to doubt their resolve in raising short term interest rates. The next few weeks will hold more guidance on this front, as the Federal Reserve holds their annual conference at Jackson Hole.

Meanwhile, international stocks continue to reign supreme, as economic growth there continues to accelerate. Emerging markets showed particular resilience during the recent turmoil, as a weakening dollar continued to support their growth story. We continue to believe that European and emerging market equities hold the most potential for outperformance at this stage in the cycle. 

While the volatility of the last few weeks has been unsettling, fundamentals remain bullish and our outlook still positive for equities. As always, we continue to remain extremely focused on monitoring unfolding market dynamics and reacting only when appropriate. Please feel free to call our office with any questions you may have.

The Pulse 08/04/2017


-Low volatility persists, markets grind higher

-Dow tops 22,000 for the first time

-Dollar continues to weaken

2017’s bull market appears to be firmly intact, extending the length of the current cycle to the second longest in modern history. Valuations remain very elevated, with a lack of volatility adding to uneasiness among investors. However, significant amounts of cash remain on the sidelines, leaving many to believe that the “irrational exuberance” that characterized previous market tops is not in play. With most S&P 500 company earnings now reported for the second quarter, strong growth continues to drive stock prices higher. Underlying fundamentals continue to favor US equities, buoyed by strong job growth, resilient consumers, and low inflation. Coupled with the recent decline of the dollar and bond markets with stubbornly low yields, tailwinds remain for US stocks to continue their run higher.

We continue to believe that the best opportunities remain abroad, as European, Japanese, and emerging market firms see a broad-based resurgence in economic activity. With most political concerns behind them and persistent easy monetary policy from the European Central Bank, equities in these markets appear poised for a resurgence while valuations are still low. Even the Japanese, who have been mired with stagnant growth for decades, are beginning to see record earnings growth over the past several quarters. Emerging markets, despite gains of over 20% year-to-date, remain one of our strongest investment convictions.

Risks to our outlook continue to center around central bank policy both in the US and Europe. As the Federal Reserve discusses drawing down it’s $4.5 trillion balance sheet of US debt and further interest rate hikes, it remains to be seen how prepared investors are for such a change after 9 years of markets awash with liquidity. How tactfully they orchestrate their tightening cycle will likely determine asset prices and have global spillover effects. We will remain hyper-focused on policy changes as they emerge.


The Pulse 07/14/2017


-Muted volatility returns with North Korea, central bank commentary

-US equities see limited declines from highs in June

-Interest rates climb, decreasing bond prices and interest rate sensitive securities

The beginning of July was marked by the Independence Day holiday, resulting in reduced trading volumes in most financial markets. Despite the low volumes, however, several significant events unfolded over the past two weeks. In a shocking but unsurprising move, North Korea fired what appears to be their first successful intercontinental ballistic missile over Japan, potentially providing them the ability to hit the US and other allies with a nuclear weapon. While markets shrugged off this event, more political instability ahead for the region remains assured. To add to the drama, central bankers in Europe and the US provided further hints of their intention to continue raising rates as planned, despite ongoing weak inflation data. Markets had mostly discounted their ability to reduce the quantitative easing that has buoyed markets for the past decade, and their hawkishness caught investors off guard. Yields accordingly climbed as bonds sold off, but have since recovered, as a strong employment report indicated additional slack in the job market remains.

In the equity markets, technology stocks continued to swing violently between gains and losses, and currently remain near all-time highs. Energy stocks moved contrarily, declining further and extending losses while oil remains in the $40-$50 per barrel range. Further pain likely remains for this sector, as long-term secular changes in energy markets move against traditional producers, and OPEC struggles to maintain control over output and prices. Looking out globally, equity markets in Europe remain well below their June highs despite a backdrop of increasing economic momentum. Emerging markets, however, have continued their climb higher on economic strength, a weakening dollar, and accelerating growth.

We believe that the global rebound in growth remains intact for now, and that volatility could remain subdued as geopolitical risks have diminished and expectations for significant policy change in the US appear unlikely given the weakened political capital of the White House and a divided Congress. With easy monetary policy continuing to provide a backstop for global financial markets, we may be in a “goldilocks” scenario where low inflation, low unemployment, and steady growth continue to support equity prices higher. We will continue to watch developments, with a careful eye on how the Federal Reserve orchestrates it’s gradual return to “normal” interest rates and a reduced balance sheet. At this time we continue to believe the most compelling investments remain international equities on a relative value basis, while maintaining a neutral position to our domestic equities and bond portfolio. As always, please feel free to call our office with any questions you may have.

The Pulse 06/28/2017


-Markets flat, mirroring soft data

-Federal Reserve continues its quest to “normalize” interest rates

-Technology sector continues to struggle

Markets appear to have reached a soft patch on their climb higher, as a confluence of factors including weak economic data, a Federal Reserve intent on reducing monetary accommodation, and stretched valuations appear to have caught up with investor’s exuberance. The S&P 500 remains mostly flat for the month, with several themes playing out underneath the benchmark surface. A major development within the US equity space was the successful passing of the Federal Reserve’s capital ratios requirement by all of the “too-big-to-fail” banking institutions. We continue to believe the banking sector is very attractively priced, given it’s strong financial position, expected regulatory reform, and the potential for higher net interest margins with rising rates. Offsetting these gains, pressure on oil prices has been a detractor over the last several weeks, as the price of this key commodity declined towards $40 per barrel, technically entering a bear market. Technology stocks continue to whipsaw between large gains and losses as the market digests the potential for tax reform, growth potential, and most recently, significant fines levied on Google from antitrust regulators in Europe.

Abroad, Brexit negotiations have proceeded in earnest, despite a lack of conviction from the British electorate who face an entrenched European Union. The outcome of any deal will be years in the making, with potential winners and losers on both sides and likely many frustrations along the way. Despite this ongoing back and forth, the underlying data in Europe remains very positive and our overweight exposure there intact. On the other side of the globe, a major change in the constitution of the emerging markets index run by MSCI is set to include Chinese A shares in their indices, potentially opening up global market’s direct access to mainland Chinese equity shares. While this event has limited implications in the near term, the shift does represent progressing acceptance of Chinese companies on the global stage. Our conviction in emerging markets also remains positive for the current period.

At this time, no significant changes to the portfolio are being made, as we believe the long-term strategic allocations are best positioned to capitalize on the current market environment. As always, please feel free to call our office with any questions you may have.

The Pulse 06/17/2017


-Markets continue to overcome political risks

-Technology stocks see sudden drop, followed by reversal

-Anticipated Federal Reserve interest rate hikes ahead


Last week’s triple threat of James Comey’s testimony before Congress, the elections in the United Kingdom, and European Central Bank meeting dominated headlines, but had little effect on financial markets. No significant information was revealed regarding Trump’s handling of Comey’s firing nor ties with Russia, the ruling party in Britain saw their power and negotiating ability in Brexit undermined, and the European Central Bank kept rates and bond purchases unchanged.

While the British pound saw a significant drop in value from the outcome of their election, other assets remained relatively unchanged from the week’s events. Friday, however, saw a significant correction begin in the technology sector, which has led gains for the year, up over 20%. The so-called FAANG stocks, (Facebook, Apple, Amazon, Netflix, and Google), had collectively accounted for a significant portion of the market’s gains year-to-date, and many questioned whether this signaled they were overpriced and overbought. Since the NASDAQ plummeted 3.8% to a low Friday, it has since recovered and continues to move higher towards it’s former peak. Market-watchers will next be looking for guidance from the Federal Reserve Wednesday to determine where interest rates are headed, as discussions of unwinding their easy monetary policy continues.

At this time, no significant changes to the portfolio have been implemented, though we continue to keep a sharp eye on technology stocks which we believe may be overpriced. We continue to find financial stocks, European equities, and emerging market equities attractive, and maintain exposure to the bond market while anticipating higher rates going forward. Cash remains an important asset class to hold at this time, to provide opportunity when a correction or dip presents itself.


The Pulse 05/23/2017


-Domestic political fallout causes spike in volatility

-Strong economic data reported overseas

-Portfolio’s adjusted for profit-taking and new opportunities

Continued reports of White House ties with Russia remain a serious concern with moving forward the policy agenda to which some attribute the recent rise in equity prices. With the firing of FBI Director Comey and allegations of other wrongdoings, markets fell the most in 8 months last week, but have since mostly recovered. Expectations in Washington remain high, however, no significant actions have been taken nor look promising with bitter Democrats in the House and Senate and a divided Republican party. Looking abroad, earnings and economic growth in Europe, Japan, and emerging markets are accelerating while valuations remain at or below their historic trends. With multiples stretched in the US, we find these markets looking particularly attractive, with fundamentals strong, some political uncertainty removed with recent elections, and fears of trade wars diminished from a tamed Trump. Despite all the headlines streaming out of Washington, the US economic backdrop remains mixed, but if growth internationally and domestically can continue to improve, markets should look past political wrangling to support higher equity prices.

While markets see a reduced probability of another rate hike in June, we believe the Federal Reserve’s resolve to normalize the interest rate environment will continue. While bond yields have come down recently from fears of the reflation trade coming undone and demand during bouts of uncertainty, we believe the general trend of higher yields and lower prices remains intact. As such, our portfolios remain well positioned to weather interest rate volatility with higher-yielding credit instruments providing income and downside protection added with lower indirect duration exposure to interest rate rises.

During the month of May we have reduced some exposure to US equities, specifically technology stocks, which have seen a significant runup as of late. While this sector remains attractive overall, some profit taking seemed prudent at this time, with the proceeds redeployed to international equities where we believe more upside remains on a risk-adjusted basis. Additionally, we raised our cash position, as the continued historically-low volatility suggests opportunities may lie ahead if a reversion to the mean and past seasonal trends emerge.  


The Pulse 05/04/2017


-Hard data shows continued economic malaise

-US government shutdown avoided, return to gridlock likely

-Markets waiting for affirmation

The month of April ended with very little movement in the markets, characterized by the gradual rise higher in equity prices. International equities continued their celebration of an easing in geopolitical tensions, with European and emerging market stocks increasing as the French election outcome became less murky and tensions on the Korean peninsula eased. Meanwhile, domestic data has continued to be underwhelming, while expectations remain elevated. Consumer spending, manufacturing, and GDP data have shown sentiment has yet to translate into real progress. This dangerous combination has increased the likelihood of a pullback if equities find it difficult to sustain elevated prices with little economic data to support them. Technology shares in particular seem aggressively priced, with double digit returns and expanding price multiples creating cause for concern.

On the fixed income side, yields have continued to drop as Washington appears to be heading for more business-as-usual, and little progress has been made in the form of fiscal stimulus, tax reform, or regulatory easing. Furthermore, the Federal Reserve agreed to hold off on any additional rate rises in May, as expected. However, they noted that recent data should be discounted and they maintained their intention of gradually raising rates through the end of the year.

At this point we are discussing adjustments to our portfolios to reflect the reality of the data streaming in, particularly in the face of lofty expectations from the markets. With the S&P up over 6.5% for the year, now may be the time to trim some of the gains in the portfolios and make cash available for future opportunities. The old adage, “Sell in May and go away” might just be appropriate at this juncture, with a cloudy outlook ahead and strong returns behind us. As we monitor the allocations over the coming weeks, trades and rebalancing may become prudent in light of emerging risks to the outlook.


 The Pulse 04/20/2017


-Hard data shows continued economic malaise

-US government shutdown avoided, return to gridlock likely

-Markets waiting for affirmation

The month of April ended with very little movement in the markets, characterized by the gradual rise higher in equity prices. International equities continued their celebration of an easing in geopolitical tensions, with European and emerging market stocks increasing as the French election outcome became less murky and tensions on the Korean peninsula eased. Meanwhile, domestic data has continued to be under whelming, while expectations remain elevated. Consumer spending, manufacturing, and GDP data have shown sentiment has yet to translate into real progress. This dangerous combination has increased the likelihood of a pullback if equities find it difficult to sustain elevated prices with little economic data to support them. Technology shares in particular seem aggressively priced, with double digit returns and expanding price multiples creating cause for concern.

On the fixed income side, yields have continued to drop as Washington appears to be heading for more business-as-usual, and little progress has been made in the form of fiscal stimulus, tax reform, or regulatory easing. Furthermore, the Federal Reserve agreed to hold off on any additional rate rises in May, as expected. However, they noted that recent data should be discounted and they maintained their intention of gradually raising rates through the end of the year.

At this point we are discussing adjustments to our portfolios to reflect the reality of the data streaming in, particularly in the face of lofty expectations from the markets. With the S&P up over 6.5% for the year, now may be the time to trim some of the gains in the portfolios and make cash available for future opportunities. The old adage, “Sell in May and go away” might just be appropriate at this juncture, with a cloudy outlook ahead and strong returns behind us. As we monitor the allocations over the coming weeks, trades and rebalancing may become prudent in light of emerging risks to the outlook.


The Pulse 04/05/2017


•              Employment numbers continue to beat expectations

•              1st quarter stock market indices finish strongest quarter since 2013

•              Fixed income securities stage a comeback during March, turning positive for the year

March concluded the first quarter of 2017 with the strongest US equity returns since 2013, as stock markets continued to rally, employment gains move higher, and inflation remains muted for now. The US economy is waiting for clear policy signals from Washington, as the usual political fights continue to go unresolved. The healthcare vote debacle, which saw Republican and Democrats wrangling over their various objectives in repealing and replacing the Affordable Care Act, ended with no vote, as an agreement was far from being reached. A number of the sectors that have outperformed since the election saw a pullback through the first quarter, with small cap stocks and value returning less than the overall market. However, we continue to remain bullish on these sectors, as the leading indicators as well as tax and growth policies, if completed, should boost growth in these pockets of the market. Furthermore, the strong dollar moves seen since the election have mostly unwound, providing a boon to US exporters.

Geopolitical tensions continue abroad, with North Korea and Syria testing the new administrations’ foreign policy resolve. Aside from the sabre rattling, we continue to keep a watchful eye on Europe, where Britain ultimately triggered Article 50 to formally leave the European Union, and French elections are due in May. As the world’s largest trading bloc, the outcome of political decisions there could have significant effects on global trade and growth going forward.

Stewardship Financial Advisors continues to believe that equities remain attractive long-term despite high valuations, though volatility is extremely likely through the end of the year. As dramatic price swings have been unprecedently low since November, this makes the probability of a pullback higher than ever. We have been patient in not overextending our portfolios to ride the unwavering rise in optimism, knowing that more attractive entry points will present themselves.


The Pulse 03/20/2017


-Employment gains remain strong

-Federal Reserve raises rates, indicates further tightening ahead

-Equity markets fluctuate

Recent weeks have seen interesting developments on several fronts, including the Federal Reserve’s interest rate outlook, economic indicators, and fluctuations in the equity markets. After a significant rise in the S&P 500 in the beginning of March, following President Trump’s more tempered first address to Congress, equities have traded in a narrow range, with the Federal Reserve as the likely culprit for moderating future advances. Several outspoken board members, including Janet Yellen herself, indicated monetary tightening was imminent as employment, wage, and inflation data continued to show outsized strength. Ultimately, on March 15th the Federal Reserve raised the key Fed Funds lending rate to .75%-1%, and maintained their expectation for 2 more increases this year. While generally considered to have a dampening effect on equity and bond prices, the markets jumped following the Fed’s statements, as the tone of their message was less aggressive than had been anticipated. As the de facto central bank to the world, foreign equities rallied further, particularly in emerging markets which had already posted very strong gains year to date. Sentiment continues to be the primary driver of gains in stock markets worldwide, with households, CEOs, and producer confidence at highs not seen in over a decade. Whether these positive feelings turn into actual growth remains to be seen.

Worries remain forever present for investors, wondering whether already stretched valuations can go any higher, if the Federal Reserve will crash market euphoria, or if political risks could unravel one of the longest bull markets in history. As always, our method at it’s foundation begins with asset allocation to diversify these systemic concerns, then takes a more granular approach to harnessing exposure to areas of the market that seem relatively attractive given their fundamentals. At the current time, we remain generally neutral on US equities, underweight government bonds, and overweight on more attractively priced international and developing markets. Our ongoing allocation updates express this outlook, but will continue to be monitored and adjusted as necessary.

The Pulse 02/22/2017


-Stock markets continue to rise, led by emerging markets.

-Federal Reserve indicates further tightening may be necessary.

-Allocation updates ahead – look for additional communications to come.

Equities have continued their gradual ascent since the election, rising on the hopes of lower taxes, less regulation, and fiscal stimulus, as well as rising corporate earnings. Consumer sentiment, manufacturing indices, and small business optimism are all trending higher, while in the background inflation has begun to creep closer to the Federal Reserve’s 2% target. With leading indicators firing on all cylinders, the Fed indicated a tightening of monetary conditions may need to be accelerated if further data shows additional strengthening. Fears of Federal Reserve actions and inflation continue to represent headwinds for the bond market, however, we believe the diversification benefit of a fixed income allocation is more important now than ever. Internationally, upcoming elections in France, banking and sovereign debt crises in Italy and Greece, and the implications from Britain’s exit from the European Union leave many questions unanswered in the world’s largest economic bloc. In the wake of the growth paradigm shift unfolding in both equity and fixed income markets, our team has spent a considerable amount of time and effort preparing our portfolios for this new reality. Our view is that economic growth may have finally turned a corner and will head cyclically higher, while longer term secular trends will result in more challenging, muted investment returns. Given this backdrop, we are repositioning our model portfolios in an effort maximize upside capture and prepare for volatility ahead. Over the next several weeks, look for additional communications outlining some of the updates to our allocations going forward. 

The Pulse-02/08/2017


-Equities continue to grind higher, domestically and abroad.

-Bond yields stabilize from post-election jump.

-Volatility unusually low, given political uncertainties ahead.

Since the swearing in of Donald Trump as President of the United States, controversy has ensued on all matters from trade, immigration, and foreign relations. However, volatility remains subdued in the markets, with equities continuing their crawl higher and bond yields stabilizing from the dramatic rise post-election. Corporate earnings have been a boon to the stock market, with the majority of companies meeting or exceeding earnings expectations for the 4th quarter of 2016. Without this pickup in profits, justifying market moves higher could become difficult, and make any correction more severe going forward. In the fixed income markets, bonds appear to have backed off from fears that rates could spike from a “Trump reflation”, with many market participants starting to question if pro-growth policies will be as easy to implement and effective as promised. Meanwhile, the Federal Reserve held off on raising the Fed Funds overnight rate as jobs data continues to be mixed with strong new hire numbers but less than stellar wage growth. Internationally, we continue to monitor the fallout from Brexit, implications from the strong dollar, and ongoing geopolitical turmoil from Iran to Mexico to North Korea. Fundamentally, we believe global growth should pick up modestly this year, supporting rising equity markets, while demographics and technology should keep a lid on inflation and bond yields. Given the tranquility that has pervaded equity markets and lofty valuations, we believe that maintaining an allocation to cash and fixed income is prudent at this time in anticipation of volatility ahead.

The Pulse - 1/22/2017

Friday January 20th, marked a historic day for the US with the inauguration of Donald Trump as the 45th President. Leading into the election, markets had been flat, trading in one of the tightest ranges in history. Data continues to be positive both domestically and abroad, and promises from the new administration will now be put to the test. Earnings results are finally moving in a positive direction and appear to be gaining momentum, providing a boost for equity prices. While the numbers are looking good, it is worthwhile to question whether stock prices have moved too quickly, and if company earnings merely justify current prices or could lead to further multiple expansion. The issues that remain unanswered are whether fiscal stimulus will have a positive effect on an economy already at or near full employment, if the new administration’s trade policies will turn into trade wars, and how far tax and regulatory reform will go in contributing to capital investment and growth.  While we remain generally bullish on US equities, the likelihood of volatility ahead makes an allocation to bonds more important than ever. As data continues to flow in, we will remain focused on the underlying economics of our portfolios over the sensationalist headlines of the day and look for opportunities as they emerge.

The Pulse - 1/11/2017

The markets have began the year much as they ended 2016, continuing their climb higher with much anticipation as we move into President-elect Donald Trump’s inauguration. The following themes continue to play out: a rotation from defensive to growth-oriented equities, a slow, steady rise in interest rates, and questions remaining as emerging and developed international markets forge their own path in the new era. Confidence indicators show remarkable strength, with small businesses and consumers believing the future looks more optimistic than it has in years. Jobs data was mixed last week, with overall new employment numbers declining and the unemployment rate rising, as would be expected with an economy at or near full employment. The bright spot in the jobs data was a significant increase in wages, which continue to increase, providing an additional boon to consumers and the US economy. Despite the good news flow continuing to roll in, the outlook for equities and bonds remains murky, with the potential for inflation, and subsequent rate rises on the horizon leaving many risks on the table. Additionally, the new administration leaves many questions unanswered, and any significant policy mistakes could lead to increased volatility throughout the year. We remain cautious and prefer a wait-and-see approach at this time before making any significant portfolio changes.

The Pulse - 12/22/2016

It appears markets will end the year strongly higher with double-digit returns, an outcome few would have predicted in January. Despite a myriad of turmoil this year, markets continued to move upward, and recent developments lead us to believe that more gains are ahead. The Federal Reserve unsurprisingly decided to raise interest rates last week, providing confirmation of a strong labor market and sound economic growth, and also reason for optimism heading into next year. As the markets have staged an impressive rally post-election, we feel confident that 2017 will be positive for equities, though not without some volatility. The sector rotation into more cyclically-oriented stocks has potentially gone too far too fast, and we believe that some reversion to the mean is warranted over the coming quarter. Likewise, fixed income assets have bore the brunt of the reflation trade, with bonds losing much of the gains for the year from rising yields. That being said, the economy appears to be on the right track for 2017, believing positive earnings growth, strong labor force participation and income figures, as well as regulatory and tax reform could finally set the stage for the much needed growth absent since the Great Recession.

The Pulse - 12/7/2016

The reflation trade continues on, with bonds suffering their worst route since the Taper Tantrum of 2013 and equities pushing to new heights. OPEC’s decision to limit production buoyed markets further with continued support for the unloved energy sector, though we believe this step to be short-lived for oil prices. Positive economic news from the US and Europe show growth is strengthening, while labor markets in the US remain on the right track. A massive sector rotation post-election from technology and consumer defensive stocks into financials and other underappreciated pockets of the stock market carries on, as interest rate-sensitive securities take the hit along with bonds. Political uncertainty in Europe remains a headwind, with post-Brexit questions lingering and Italian election upheaval leaving the future of the European Union in doubt. The populist backlash seen in Britain, the US, and Italy may embolden similar feelings in France and the Netherlands, both of which face elections in 2017. Despite geopolitical concerns, we see US growth accelerating in 2017 and 2018, with the promise of fiscal stimulus and tax cuts providing a jump start to an otherwise low-growth economy. In light of the extraordinary questions that remain, our portfolios are maintaining our wait-and-see approach, with our goal of harnessing much of the upside and limiting potential shocks always at the forefront of our investment philosophy.

The Pulse - 11/26/2016

It’s a new world following the election - the S&P 500 continues to rally, led by some of the most unloved sectors over the past several years. Value stocks, including financials, health care, and consumer cyclical companies took off with the promise of fiscal stimulus and less regulation seen as a tailwind for these parts of the economy. On the contrary, bond markets lost more than a trillion dollars in value in the first week since the election, as investors see rising inflation with matching interest rate hikes ahead. Other sectors, namely REITs and dividend-oriented equities also fell, with the paradigm shift in growth expectations ahead. Internationally, emerging markets and European equities also dropped, as Trump’s promises of trade barriers and tariffs don’t bode well for business in these regions. In light of these moves, we reduced our Treasury positions that are most sensitive to interest rates, while maintaining our overweight allocation to cash, as we wait for opportunities. We still believe there is reason to be cautious in the current environment, and prepared for sudden shocks ahead. We are generally optimistic on the intermediate future of US equities, while we continue to keep a watchful eye on bonds going forward. As the markets continue to adjust to the post-election world, we will continually monitor the portfolio allocations for opportunities and risks as they emerge.

The Pulse - 11/9/2016

As the polls closed and it became ever more apparent that Donald Trump would be our next president, uncertainty remains in the markets with a Washington outsider in the Oval Office. Equities had seen a steady downward trajectory for the past several weeks, as questions surrounding the election provided no clarity for the future direction of the economy or the markets. No one can say for certain what the future holds with a Trump presidency, but Enormous challenges remain ahead for the country, and putting this election behind us and mending the vitriol that has surrounded this run for the White House will certainly bode well for markets over time. Looking back to fundamentals, employment remains healthy, growth slow but steady, and corporate earnings are positioned for a turnaround. While we expect volatility to be heightened as a result of the surprise outcome of this election, we have positioned the portfolios tactically in preparation for such a move. As developments continue to roll in, we will monitor the situation and provide any necessary updates.

The Pulse - 10/26/2016

As mixed economic indicators from both the US and China continue to come to light, the markets have continued to slowly decline and volatility remains elevated. However, as earnings season kicked off, strong results from several key players were reported, particularly with the financial sector showing outperformance in both revenues and profits, driven primarily by fixed income trading during the Brexit referendum. Corporate earnings are generally expected to begin a turnaround after many quarters of declines, which could be a boon for the markets heading into next year. Additionally, inflation has begun to accelerate, and coupled with the strong employment numbers we continue to see, the case for a rate rise in December continues be likely and logical. Internationally, the European Central Bank indicated it would remain accommodative and extend its quantitative easing program past March 2017 as originally scheduled, as a way of tapering their extraordinary policy efforts to increase inflation and employment in the struggling Euro area. The diverging monetary policies of the US and the rest of the world will continue to remain a theme in the markets over the next several quarters, with the hope that as easing is unwound, fiscal policy from governments and corporations will step in to boost growth. Finally, with the US Presidential election only 2 weeks away, investors will remain on edge until the final poll results roll in.    

The Pulse - 10/10/2016

October got off to a rocky start, with the markets finally preparing for what appears to be an inevitable rise in interest rates in December. Yields on bonds have risen steadily, as their prices have declined with monetary tightening signaled from both the US and Europe. While the European Central Bank did not indicate any intention of raising rates, currently held below zero, their comments seem to belie that quantitative easing should be wound down in the coming years. Declines have not been contained to only the bond markets, as utility stocks, high-dividend payers, real estate, and other interest rate sensitive investments bore the brunt of rising yields. On a positive note, several economic indicators in recent weeks have shown growth in manufacturing, continued housing strength, and consumer health holding steady. As we navigate this difficult environment for both equities and bonds both domestically and abroad, we continue to hold cash and short-term bonds as we look for opportunities. In the near-term, allocation changes are in the process of being implemented as we gear up for the US election and looming Federal Reserve meetings through the end of the year.

The Pulse - 9/26/2016

While the beginning of September appeared to be more business as usual, with the stock market moving ever higher, several news items and central bank announcements caused equity volatility to reemerge. Jitters from hawkish statements by Federal Reserve board members, an unwillingness of the European Central Bank to expand their monetary stimulus, oil-price volatility, and strong numbers reported for US household income growth whipsawed markets through the middle of September. Ultimately, on Wednesday the 21st the Federal Reserve announced they would maintain the Federal Funds rate between .25% to .5%, with equity and bond markets rallying accordingly. Given that their action reaffirmed our outlook, no significant changes were made to the portfolios from this announcement. Looking forward, we believe equities will continue to grind higher through the remainder of the year but likely remain within the range they have been in since July, with earnings growth necessary to fuel prices much higher. That being said, our cash position will remain relatively overweight, as we expect more bouts of volatility ahead in both bonds and stocks, with the November election and December interest rate decision in the coming months.

The Pulse - 9/12/2016

August ended with all eyes on the Federal Reserve’s Economic Symposium in Jackson Hole, Wyoming where policy makers discussed the future of monetary policy and the path of interest rates going forward. Opinions and interviews with board members sounded hawkish, setting up the potential for a September rate rise, particularly if a strong August jobs report and continuing robust economic news persisted. With the August nonfarm payrolls increasing by a modest 151,000 jobs, under the expected 180,000, and followed by the weakest services sector activity index reading in six years, September is now looking increasingly unlikely for a rate rise. Other economic indicators remain positive, however, and a recession continues to seem improbable in the near term. The portfolios saw some minor repositioning, with a reduction in short term bonds, and an increase in the allocation to high-quality stocks and real estate. As much as we prefer not to hold cash earning 0%, we believe at this time it is wise to maintain our above-average cash position, staying cautious going into the elections and given the near certainty of a rate hike later this year.

The Pulse - 8/29/2016

The month of August has been quiet in the markets, with unusually low volatility and a slow grind higher for equities and bonds. We continue to digest data from Brexit and the effects on the global economy. Oil prices seem to have stabilized, trading in the $40-$50/barrel range for the time being. Global developed markets have moved in lockstep with US equities, while emerging markets have entered a bull market. The Fed continues to provide cryptic guidance on interest rate policy, and we believe a December rate hike is likely, barring any economic shocks leading up to their December meeting. Given the unknowns of Fed policy, the US presidential election, and stretched valuations in the bond and equity markets, we continue to hold an above-average amount of cash in preparation for any volatility ahead. In the meantime, our allocations are well-positioned to continue to capture upside growth while maintaining downside protection.

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