The Intelligent Investor
A bi-weekly publication from Consultiva Internacional, Inc. (Registered Investment Adviser) October 18, 2016
From the Executive Desk
According to the International Monetary Fund’s 2016 revised outlook, global growth is projected to slow to 3.1 percent this year before recovering to 3.4 percent in 2017. The forecast, revised down by 0.1 percentage point for 2016 and 2017 relative to April, reflects a more subdued outlook for advanced economies following the June U.K. vote in favor of leaving the European Union (Brexit) and weaker-than-expected growth in the United States. These developments have put further downward pressure on global interest rates, as monetary policy is now expected to remain accommodative for longer. This somewhat explains the Federal Reserve’s continued resistance to raising the federal funds rate, even though the U.S. economy has been on a seven-year growth trajectory as seen in our previous newsletter through raising leading and coincident indicators. In her recent remarks at the IMF-World Bank Annual Meetings Plenary, IMF managing director Christine Lagarde said that “advanced economies remain stuck in a low-growth, low-investment, low-inflation cycle. And while growth in emerging markets is picking up, low-income commodity exporters are struggling with low prices”. For Lagarde the challenge is not just increasing economic growth, but that improvements worldwide are shared by all, what she calls inclusive growth; “We need growth—but we need inclusive growth. We need to transition to the digital age— but a transition that benefits everyone. And we need to accelerate now.” Lagarde challenges leaders to think about three potential solutions to local economies; increasing equal opportunity for women and for workers in need of retraining, sharing the economic public burden in proportion to resources, and preserving fair competition and access to market for all. How inclusive is economic progress in your backyard?
Myrna Rivera, CIMA®
Founder & Chief Executive Officer
At the start of September, traders were giving a 34% probability that the Federal Reserve (Fed) would raise interest rates at the conclusion of their policy meeting later in the month. Investors and analysts paid close attention to economic releases, as the Fed repeatedly stated that an increase in rates would be data-dependent. As has been the case for the past several months, economic indicators were lukewarm. U.S. manufacturing contracted, while activity in the services sector fell to the lowest level in six years. The August labor report showed a gain of only 151,000 jobs, below an expected 180,000 increase. These releases lowered the probability of a rate hike, even though subsequent data painted a more optimistic picture for the U.S. economy. Inflation rose by 1.7% year-over-year in August, and was subsequently within striking distance of the FED’s 2% target. Consumer confidence climbed to a nine-year high, and second-quarter U.S. GDP growth was revised up to 1.4%, versus the previously reported 1.1% gain. These conditions underscored the division among policy makers about raising interest rates. In the end, the Fed postponed raising rates once again.
(As of October 14, 2016)
CPI: +1.1% Chg. from yr. ago
Unemployment Rate: 5.0%
GDP: 1.4% Comp. Annual rate of Chg. on 2016:Q2
Ind.Prod.Index: -0.4% change from previous month
Source: St. Louis Fed. Res.
CPI: 0.2% Chg. from yr. ago
Unemployment Rate: 10.1%
GDP: 0.3%, Comp. Annual rate of Chg. on 2016:Q2
Ind.Prod.Index: 1.6% change from previous month
Source: Moody’s Analytics
CPI: -0.5% Chg. from yr. ago
Unemployment Rate: 3.1%
GDP: 0.2%, Comp. Annual rate of Chg. on 2016:Q2
Ind.Prod.Index: 1.5% change from previous month
Source: Moody’s Analytics
CPI: -0.1% Chg. from yr. ago
Unemployment Rate: 11.3%
Payroll Employment: -0.3 Chg. from yr. ago
GDB Econ. Act. Index: -1.3% Chg. from yr. ago
Source: P.R. GDB
Stocks: The S&P 500 slipped 0.1% lower (-0.1% price return; +0.1% total return net dividends) for August, snapping its five-month winning streak. Financials were the best performing sector, catching a boost from hawkish Fed commentary. Energy shares also edged higher as West Texas Intermediate crude prices climbed 7.5%, the biggest monthly advance since April.
Bonds: U.S. Treasuries declined in August for the biggest monthly loss since June 2015. The benchmark 10-year Treasury note traded in its tightest monthly range in almost a decade, with the yield shifting between 1.46% and 1.63%.
Alternatives: In contrast to bonds, the dollar rallied after mid-August, paring its loss for the year in sympathy with the higher rate expectations. Fed futures spiked by month’s end, with the prospect of an interest rate increase in September climbing to 40%, with a 62% probability by December.
Evangeline Dávila, CIMA®
Chief Research & Investment Officer
Source: Callan Associates, Inc.
What to Do?
The forces shaping the global outlook, operating both over the short and long term, point to subdued growth for 2016 and a gradual recovery thereafter. These forces include new shocks, such as Brexit; ongoing realignments between China and commodity exporters; slow-moving trends in demographics and productivity growth, as well as noneconomic factors, such as geopolitical uncertainties. Amid an uncertain scenario, were downside risks are combined with expectations of muted returns, we continue to recommend prudent asset allocation and risk assessment, based on future capital needs, for plan sponsors, institutions and individual investors. Due diligence reviews and an adherence to a well-developed investment policy remain the most prudent course for long-term investors. Continued fiduciary education is paramount.
Consultiva Internacional Inc. (“Consultiva”) has compiled the information for this report from sources Consultiva believes to be reliable. Sources include: investment manager(s); mutual fund(s); exchange traded fund(s); third party data vendors and other outside sources. Consultiva assumes no responsibility for the accuracy, reliability, completeness or timeliness of the information provided, or methodologies employed, by any information providers external to Consultiva. Conclusions reflect the judgement of Consultiva Investment Strategy Committee at this time and is subject to change without prior notice. There also can be no guarantee that using this information will lead to any particular result. Past performance results are not necessarily indicative of future performance. Diversification does not guarantee a profit or protection against loss. This document is for informational purposes only and is not intended to be an offer, solicitation, recommendation with respect to the purchase or sale of any financial investment/ security or a recommendation of the services supplied by any money management organization neither an investment advice or legal opinion. Investment advice can be provided only after the delivery of Consultiva’s Brochure and Brochure Supplement (ADV Part 2A and 2B) once a properly executed investment advisory agreement has been entered into by a client and Consultiva. This is not a solicitation to become a client of Consultiva. There are risks involved with investing including the possible loss of principal. All investments are subject to risk. Investors should make investment decisions based on their specific investment objectives, risk tolerance and financial circumstances. The registration with the Securities and Exchange Commission does not imply a certain level of skill or training.