The Intelligent Investor
A bi-weekly publication from Consultiva Internacional, Inc. (Registered Investment Adviser) July 25, 2017
Myrna Rivera, CIMA®
As recently reported by The Washington Post, the Federal Reserve is divided over its longer-term monetary policy path. While the majority of members of the Federal Open Market Committee (FOMC) voted to raise interest rates in June, the Fed seems unsure of its plans for the longer-term, because the economic data available does not show a vigorous response to the recent interest rate hikes. The minutes of the June FOMC meeting show that members are divided over precisely when to reduce the Federal Government’s massive balance sheet. Some officials suggested beginning in the next few months, while others advocate for holding off until they see further economic progress. However, Fed Chair Janet Yellen forecasted another rate hike this year and three more rate hikes in 2018 and 2019. Economists are increasingly questioning whether the economy is strong enough to warrant this relatively ambitious pace of rate hikes because they continue to see mixed results. To some, the U.S. economy looks strong in many respects; the labor market strengthening and business investment and consumer spending recovering from recent lows. Yet others point to less encouraging indicators, including stubbornly low wage growth, slower residential investment, and reduced spending by state and local governments. The FOMC meeting minutes also noted that the Treasury yield curve has flattened, meaning that investors are not finding a reward for longer-term investments vs. shorter-term ones. This signals doubts about the ability of the economy to grow and generate financial returns in the longer run. Instead, investors continue to pile into the stock market, which continues to hit record highs, buoyed by solid corporate earnings and expectations of a corporate tax cut. Some analysts feel the Fed’s decision to reduce its holding of assets could begin to curtail the boom in equities, because the purpose of accumulating $4 trillion in securities after the financial crisis was to make lending cheaper and stimulate the economy. Now, Fed officials have to weigh in on the opposite effect; unwinding the Fed’s large balance sheet could lead to higher lending costs and slower growth. We shall see.
Edmundo J. Garza
U.S. economic data was mixed in June. Positive news in employment, slowing inflation, and another increase in the first quarter GDP estimate were offset by negative news in retail sales, durable goods, and consumer sentiment. On the employment front, initial jobless claims were under 250,000, and continuing claims were under 2,000,000 each week in June. Headline inflation dropped by 0.1% in May, making the year-over-year change just 1.9%, and core CPI (ex-food and energy) was up 0.1% in May, but just 1.7% over the trailing 12 months. Also, the final revision to first quarter GDP pushed the figure to 1.4%, double the original 0.7% estimate in April. On the downside, U.S. retailers reported a decline of -0.3%. More than 300 retailers have filed for bankruptcy in the first half of the year, up 30% from last year. There have been 5,300 further store closings announced through June of this year, three times last year’s number, and more than 85% of the number of closings in 2008, the worst year on record. Durable goods orders fell 1.1% in May, following a similar decline in April. Those two drops were preceded by four months of reasonably strong increases, a sign that businesses and consumers are less confident in the Trump administration’s ability to effectively implement its agenda of healthcare and tax reform, in addition to more regulatory changes. Adding more misunderstanding is the housing market, which had very mixed signals this month as well. Nationally, average home prices rose by 1.2% from April to May and by 6.6% over the trailing 12-month period. Despite the jump in prices, both new and existing home sales were significantly stronger in May. However, home builders’ confidence fell in May and June (albeit it still remains positive), evidenced by the reduced new housing starts in May, the third straight monthly decline (see graph I below). Finally, the pending home sales index fell 0.8% in June, also the third straight decline.
Graph 2 – Housing Starts in the U.S.
(As of July 18, 2017)
CPI: 1.6% Chg. from yr. ago
CPI: 1.3% Chg. from yr. ago
CPI: 0.4% Chg. from yr. ago
CPI: 0.5% Chg. from yr. ago
Evangeline Dávila, CIMA®
Stocks: International equity markets were mixed in June, with most returns either in line or slightly lower than the U.S. equity market. The MSCI EAFE Index posted a return of -0.2% for the month, as strong returns from New Zealand and Australia were offset by negative returns from most of Europe. Meanwhile, the MSCI Emerging Markets Index posted a gain of 1.0% for the month, with strength in Asia offsetting weakness in Eastern Europe and the Middle East (mostly Russia and Qatar).
Bonds: U.S. and international fixed income markets pulled back slightly in June, after posting strong performance in April and May. The Federal Reserve raised the Federal Funds rate range by 25 basis points in its June meeting, a move highly anticipated by the market which had priced the expectation into Fed Funds futures. The June hike marked the third consecutive quarter with a 25 basis point rate increase and the fourth overall in the current cycle.
Alternatives: The U.S. dollar depreciated against most major currencies in June (the Euro, British pound and Swiss franc, as well as the Australian, New Zealand and Canadian dollar), despite the increase in short-term interest rates. Hedge strategies posted gains for June with the HFRI Fund Weighted Composite Index advancing +0.4% for the month, the eighth consecutive monthly gain and the 15th gain in the last 16 months.
Ernesto Villarini Baquero, MBA
What does Trump’s decision to leave the 2016 Paris climate agreement mean for investors? The Trump administration pulled the United States out of a landmark climate accord aimed at curbing greenhouse gas emissions. But the withdrawal does not change how the planet works or how economies around the world are threatened by the unsustainable use of natural resources. Steven Cohen, Executive Director of the Earth Institute at Columbia University, recently wrote about the potential impacts of the withdrawal on the U.S. economy. Cohen argues that renewable energy will ultimately replace fossil fuels regardless of what the U.S. does, because it makes sense both environmentally and economically. Initiatives will inevitably still be carried out by cities, states and corporations worldwide, and the withdrawal could greatly diminish the United States’ standing as a source green innovation and technology, and as leading provider of “green” products and services. Cohen recognizes that Trump notwithstanding, many companies and state governments will maintain their pledge, not just because it is the right thing to do, but because the market has proven there’s money to be made in energy efficiency and renewable energy. Hence, investors can continue to consider a broad spectrum of investment opportunities because research institutions, innovators and manufacturers will continue to pursue improvements in battery technology, microgrids, solar cells, windmills, energy efficient appliances, along with other energy breakthroughs. They just might not have the support of the U.S. government which might be cutting spending on scientific research and reducing their own purchasing of these products and services.
U.S. stocks fluctuated in June, with the S&P 500 (+0.6%) and Dow Jones Industrial Average (+1.7%) climbing to finish their best first half to a year since 2013. The Nasdaq (-0.9%) faltered but, despite the June drop, the tech-heavy index finished the first six month of 2017 with a robust 14.7% advance. In fixed income, U.S. Treasuries advanced to begin the month amid stagnant inflation and mounting geo-political concerns. 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 Internacional Inc. (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.