Quarterly Investment Commentary April, 2017Submitted by Harvest Asset Group, LLC. on August 17th, 2017
While the first quarter of 2017 delivered strong investment returns, many investors are wondering out loud “what’s next?” At any point in time, it is easy to find confident sources making predictions about the future - either proclaiming doom or prosperity for markets:
“I hope I am wrong, but I think we’re in a big, fat, juicy bubble.” - Presidential Candidate, Donald Trump on CNBC’s “Power Lunch,” February 8, 2016
The truth is, as an investor it is decidedly non-productive to try to “get out of the way” of market downturns. Because markets are “predictably unpredictable,” acting on what you think is going to happen next is likely to be a frustrating and costly experience. It may even jeopardize your long term financial security.
Several methodologies exist which can help manage the risks associated with short term market volatility. One key principle we apply is to invest according to when you need the money. We believe that integrating your investments with a personal financial plan – to include risk management associated with anticipated cash flow needs and tax planning – can add more value than attempting to “beat the market.”
We acknowledge that today, like during many points in history, there are a number of legitimate factors for investors to worry about. During all markets, we hope for the best, and plan for the worst.
Remember that as in investor – time is on your side.
Today’s Economic Perspective
The first months of the Trump presidency have been filled with confusion and controversy. There has been an expectation that companies and individuals will soon be paying fewer taxes and be burdened by fewer regulations, leading to higher profits and overall prosperity. Add in a trillion dollars of promised infrastructure spending, and the expectation was an economic boom across virtually all sectors.
However, there is, as yet, no sign of that boom; just a continuation of the slow, steady recovery that the U.S. has experienced since 2009.
The U.S. and global economies are continuing to slowly expand. Europe’s economic outlook is brightening, and emerging markets have rebounded sharply in response to signs of improving global economic growth and firmer commodity pricing.
The U.S. economy is at full-employment and U.S. households have experienced strong growth in personal income. Evidence suggests American families are saving more and carrying less debt.
Forward-looking economic data, as captured by the latest index of leading economic indicators released March 17, 2017, is continued growth ahead, according to the Conference Board.
But the growth is likely to be less than the economic boom many were led to expect.
Today’s Market Perspective
Equity markets advanced globally for much of the quarter, yet struggled in March as Trump’s agenda was set back by a failed attempt at healthcare reform that left investors wondering whether his business-friendly tax and regulatory reforms would be delayed or stymied.
Large U.S. companies have continued to lead the pack among asset classes for performance. The S&P 500 index has been growing at a robust rate over the last eight years, and the first quarter of 2017 provided the highest growth for U.S. large cap stocks since the last three months of 2013. Other market sectors, such as international developed, and small cap companies, grew at a more moderate rate.
While stocks are at record highs, the economic environment of low inflation and Federal Reserve policies that are accommodative to business suggest that current profit margins may be sustainable. A number of analysts suggest the market is fully priced, but not over- priced, relative to earnings and earnings projections.
The bull market for large U.S. companies is aging, and it should not surprise anyone if we experience a correction (a correction being defined as a drop in value of greater than 10% followed by continued growth). Corrections are a normal part of market cycles, and should be expected and planned for.
Tax reform debate is coming, and like the healthcare legislation, there seems to be no pre-prepared plan for Congress to vote on. Similarly, there have been no details on the infrastructure package, so we don’t know whether it will be a budget busting package of pork barrel projects or a real contribution to America’s Global competitiveness.
These factors can impact earnings growth, which ultimately drives stock values. Given the currently high valuation levels of equities, one can expect equity prices to be very sensitive to news events in the coming months. Expect short term volatility.
While many of us our wondering “what’s next,” no one really knows. Historically the market has gone up and down in the short run, and up over the long run. So we assume it will go down at some point in the short run. However, if you know when it will happen – or even what year – then you have a better handle on the future than most senior economists.
Market volatility is normal. We help ensure your investment management is integrated with your financial planning to help insulate your investments from the short term impact of unpredictable market shifts.
Our investment process reflects a strong belief in core investment principles. We advocate the benefits of a long-term, broadly diversified investment strategy, and aligning your investments with your goals. Having a disciplined process, investing according to when you need money, and constructing a strategy that is driven by your unique circumstances, can help you to meet your personal goals while participating in all market cycles.
We are committed to providing you objectivity and steady guidance through both volatile markets and euphoric markets – to give you the peace of mind to enjoy your life and focus on what really matters most to you.
Harvest Asset Group, LLC