The Intelligent Investor
A bi-weekly publication from Consultiva Internacional, Inc. (Registered Investment Adviser) June 27, 2017
Myrna Rivera, CIMA®
As reported by The Conference Board on June 22, both the Index of Leading Economic Indicators (LEI) and the Index of Coincident Economic Indicators (CEI) rose to fresh record highs last month. This suggests that the U.S. economy is likely to remain on, or perhaps even moderately above, its long-term trend of about 2% growth for the remainder of the year. The LEI experienced positive contributions in May from all of its components except for building permits and weekly manufacturing hours. The other eight indicators with positive contributions included the interest rate spread, the ISM® new orders index, average consumer expectations for business conditions, the Leading Credit IndexTM, stock prices, average weekly initial claims for unemployment insurance, manufacturers’ new orders for consumer goods and materials, and manufacturers’ new orders for nondefense capital goods. Likewise, the CEI saw most components advance over the past month, with three of the four indicators increasing. The positive contributors to the index were personal income, employees on nonagricultural payrolls and manufacturing and trade sales. Industrial production held steady in May. The growth rate for both indexes has been highly and closely correlated with the year over year growth rate in real GDP. The big worry, of course, is the narrowing of the yield curve spread in recent weeks. It has been a reliable indicator of recessions when it has turned negative in the past. However, it hasn’t turned negative yet, and that it is only one of the components of the LEI. There are nine others, including the S&P 500, which is at a record high.
Graph 1 - Composite Indexes for the U.S.*
Edmundo J. Garza
Earlier this month the World Bank Group released its most recent forecast for global economic growth, predicting it would strengthen to 2.7% in 2017, up from a post-crisis low of 2.4% in 2016. Growth in advanced economies is expected to accelerate to 1.9% this year, while emerging markets and developing economies are expected to grow at a rate of 4.1%. During the past six months, a recovery in industrial activity has coincided with a pickup in global trade, and commodity prices have stabilized. However, some risks continue to cloud the horizon; namely, new trade restrictions in the United States that can derail the increase in trade; persistent policy uncertainty that can dampen investor confidence; and exceptionally low market volatility, which could bring about a reassessment of policy-related risks that can provoke financial turbulence. On a regional perspective, growth in East Asia and the Pacific is projected to reach 6.2% this year and 6.1% next year. This is due mostly to a slowdown of 0.2% year-over-year in China. Countries contributing positively to growth, and responding mostly to modestly rising commodity prices and greater amounts of investments, include Indonesia, Thailand and the Philippines. In Europe growth is expected to accelerate to 2.5% in 2017 and 2.7% in 2018. In western countries growth is supported by the unwinding of geopolitical risks and domestic policy uncertainty, while in the east gains are related to increased consumption, strengthening oil prices and accommodative fiscal policies that promote economic expansion. Growth in Latin America is projected to strengthen to 0.8% in 2017, with Brazil expected to expand by just 0.3% this year. Rising commodity prices will support agricultural, metal and energy exporters, while tourism will play a larger factor in countries along the Caribbean Basin.
Graph 2 – Global Growth Forecast
(As of June 11, 2017)
CPI: 1.9% Chg. from yr. ago
Unemployment Rate: 4.3%
GDP: 1.2% Comp. Annual Rate of Chg. on 2017:Q1
Ind. Prod. Index: 0.0% change from previous month
Source: St. Louis Fed. Res.
CPI: 1.4% Chg. from yr. ago
Unemployment Rate: 9.3%
GDP: 0.6%, Comp. Annual Rate of Chg. on 2017:Q1
Ind. Prod. Index: 0.5% change from previous month
CPI: 0.3% Chg. from yr. ago
Unemployment Rate: 2.8%
GDP: 0.3%, Comp. Annual Rate of Chg. on 2017:Q1
Ind. Prod. Index: 4.0% change from previous month
Evangeline Dávila, CIMA®
Stocks: The U.S. MSCI index rose 0.2% last week, while the World ex-U.S. index trailed the U.S. MSCI for a third week, rising 0.1% compared to a 0.4% decline a week earlier. Emerging Markets Asia was the week’s best-performing region, with a gain of 1.4%, while Latin America was the week’s worst-performing region, with a decline of 1.6%.
Bonds: Last Wednesday, the Federal Reserve announced it would raise the fed funds rate by a quarter point — its fourth rate hike since starting to tighten in December 2015. The iShares Bloomberg-Barclays Aggregate Bond ETF (AGG) was unchanged in premarket trading the following day. Year-to-date, AGG has gained 1.6%, versus a 9.5% rise in the benchmark S&P 500 index during the same period.
Alternatives: Industrial metals dominated last week’s best performers among commodities: Zinc (7.3%), Lead (5.8%), Copper (2.5%), and Nickel (1.6%). The best performers in 2017 so far are Lean Hogs (18.9%), Wheat (16.1%), Feeder Cattle (15.9%), Kansas Wheat (15.3%), and Lead (11.0%). The energy-related commodities continued to worsen last week and are dominating this year’s laggards again: Sugar (-32.5%), Natural Gas (-20.8%), Heating Oil (-20.2%), Crude Oil (-19.9%), and Brent Crude (-19.5%).
Ernesto Villarini Baquero, MBA
Imagine you’re a small nonprofit providing health prevention services to the homeless with $200,000 in monthly expenses and an average monthly income of a little over $220,000. You have just enough money to operate with a little extra to set aside. Then your main funder informs you that they are withholding an expected donation for 6 months and your cash flow looks to fall short by 30% in thirty days. Can you keep your operation running without affecting quantity and quality of service? If you have an operating reserve you can survive the temporary shortfall. If not, your directors might have to make some drastic decisions. It might come to some as a surprise, but a study conducted by the Urban Institute in Washington DC showed that more than half of the capital’s charities had dangerously low operating reserves and a quarter of them had none at all just when the U.S. economic recession entered into full swing between 2008 and 2009. During this time major foundations lost a median value of 28% of their endowments. State and local governments also cut back providing fewer grants and government contracts. Needless to say, many of these organizations were forced to shut down or curtail their activities significantly. Those that had sufficient reserves were able to “whether the storm” and confront a new scenario. As with an individual’s or family’s savings, nonprofit financial experts recommend that organizations maintain a reserve ratio equivalent to three months expenditures. Operational reserves can grow on their own when the monies set aside are invested in the capital markets, and also serve as a source of unrestricted income for new developments and program innovation, which usually does not respond to an external funding source.
The U.S. Small Cap sector has performed well recently on the expectation that President Trump would introduce significant tax cuts which would benefit smaller companies the most. However, Trump has not made any progress on introducing tax cuts and looks increasingly unlikely to deliver on his promises. The new version of the Health Bill, currently being discussed in Capitol Hill is an example of policy changes that not only reverse the Obama administration, but also end up going against segments of the economy Trump wanted to boost, in this case small and medium sized business. Amid an uncertain scenario 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 is a Registered Investment Adviser. The registration with the Securities and Exchange Commission does not imply a certain level of skill or training. 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. Global and international investments may carry additional risks that are generally not associated with U.S. investments, such as currency fluctuations, political instability, economic conditions and varying accounting standards. Annual, cumulative, and annualized total returns are calculated assuming reinvestment of dividends and income plus capital appreciation.