A bi-weekly publication from Consultiva Internacional, Inc. (Registered Investment Adviser) February 10, 2018
Myrna Rivera, CIMA®
After a bit of tranquility has settled back into the U.S. stock market, we can take a look at what happened last week. It seems the initial catalyst for the equity sell off was rising bond yields. Yields were climbing though the equity rout and by Thursday, the S&P 500 had fallen by -3.75%, while 30-year treasury yields rose to 3.13%. The implication of bonds’ inability to rally in such an environment is that they have entered a structural bear market, which spells headwinds for equities. Now, when bull markets begin to perish there's usually multiple fingers pointing to potential causes. The blame on last week’s sell-off could be pinned on inflation, the synchronized global growth surge, lacking investment in new capacity, or demographic shifts that are changing savings patterns in developed economies. Perhaps, investors have started to recognize that fiscal policies have been accommodating for far too long. Whatever reason, the fact remains that none of the above factors are about to roll-over anytime soon, and a bond bear market may be here to stay. Another obvious concern had been low volatility, which spiked last week to levels not seen in the previous five years. Interestingly enough, volatility trading soared during the same time period, but it is likely that moving forward the number of investors will be limited as the S&P 500 implied volatility settles back closer to its long-term mean of around 17%. If so, that could mean we face an environment of higher interest rates and higher volatility, which is hardly conducive to a continued bull market, and the waking of the “bear” ever more likely. Fortunately, there are also reasons to be optimistic; the corporate bond market has remained calm, we continue to live in an easy fiscal and monetary policy environment globally, and foreign exchange markets have seen little increased volatility. We are however entering a different world and most investors’ portfolios are probably still built around the trends seen over the past five years. At the very least one would expect a few hiccups will the markets adjust. If you want to know what we expect, join us at our Annual Investor Conference: The Pursuit of 8%. It will be our pleasure to greet you there.
Edmundo J. Garza
In hindsight the 2017 stock market rally was no fluke. The global economy turned out very strong numbers last year. Let’s recap: In the U.S., the Federal Reserve raised interest rates three times (March, June, December), by 25 bps each date. President Trump named Jerome Powell as the next Fed Chair, replacing Janet Yellen, whose term expires this month. Inflation remained benign as headline CPI was +2.1%year-over-year, fueled by a 16.5% increase in gasoline, and core CPI (ex-food and energy) was +1.7% year-over-year. Prices of goods fell 0.9% year-over-year, and declines were broad-based. The Federal Reserve's favored measure of inflation, the PCE price deflator, gained 1.5% over 2016, remaining below the Fed's target of 2%. Labor markets remained tight with the unemployment rate closing at 4.1%, the lowest unemployment rate since 2000. However, average hourly earnings growth continued to languish at 2.5% over the previous year. Strong retail sales during the holidays were in line with high consumer confidence and a robust job market, U.S. retail sales in the holiday period rose at their best pace since 2011. Manufacturing continued to show strength as the ISM Index exceeded 50 (indicating expansion) for 15 consecutive months through November. Economic news outside of the U.S. was also encouraging for international capital markets in 2017. The Eurozone experienced GDP growth of +2.6% year over year during the 3rd quarter. Inflation remained low as the European Central Bank upgraded its 2018 forecast for growth from 1.8% to 2.3% and kept its interest rates unchanged in the fourth quarter. The unemployment rate fell to 8.8%, which is below 9% for the first time since 2009, with Germany leading the way with a record low 3.6% unemployment rate. Japan's economy also continued to grow as the unemployment rate reached a 24-year low of 2.7%.
(As of January 25, 2018)
CPI: 2.1% Chg. from yr. ago
Source: St. Louis Fed. Res.
CPI: 1.4% Chg. from yr. ago
CPI: 0.8% Chg. from yr. ago
Source: Moody’s Analytics
CPI: -0.8% Chg. from yr. ago
Evangeline Dávila, CIMA®
Stocks: The S&P 500 Index gained 21.8% in 2017, hitting 62 record highs and having only eight days of 1% or more fluctuations, the lowest since 1964. Markets were fanned by strong corporate earnings, expectations for tax cuts, and share buybacks. In the U.S. Large- outperformed small-cap and Technology was the leading S&P 500 sector for the year with a +38.8% return.
Bonds: The U.S. yield curve continued its flattening trend throughout the year. The 2-year U.S. Treasury yield climbed 69 bps to close at 1.89%, while the 30-year U.S. Treasury yield dropped 32 bps and closed at 2.74%. This trend reflects the Fed's tightening bias as well as benign inflation. The municipal bond market performed well in 2017 and demand remained strong even in the face of uncertainty around tax changes.
Alternatives: Most liquid real assets had a positive performance in 2017 as global economic growth continued and expectations for future inflation rose. Energy infrastructure MLPs were the exception, as the sector evolves in the wake of heightened oil price sensitivity and concern over the impact of tax reform. Brent crude oil prices closed the year at $64/barrel, the highest since 2014 and were up 12% for the year.
Sources: Callan Associates, Bloomberg, S&P-DJ, MSCI, FTSE-Russell, Citigroup, Credit Suisse, Hedge Fund Research
Ernesto Villarini Baquero
Befuddled by the recent activity in the stock market? Worried about the overly announced incoming correction? Look at the economy before making any sudden moves. The Conference Board's index of Leading Economic Indicators (LEI), comprised of 10 components whose changes typically precede changes in the US economy, increased 0.6 percent in December to 107.0 (2016 = 100), following a 0.5 percent increase in November, and a 1.3 percent increase in October. This shows the U.S. economy remains in positive territory and shows no warning signs of a slowdown or a recession. In a recent press release, Ataman Ozyildirim, Director of Business Cycles and Growth Research at The Conference Board, said; “The U.S. LEI continued rising rapidly in December, pointing to a continuation of strong economic growth in the first half of 2018. The passing of the tax plan is likely to provide even more tailwind to the current expansion.” He added that; “the gains among the leading indicators have been widespread, with most of the strength concentrated in new orders in manufacturing, consumers’ outlook on the economy, improving stock markets and financial conditions.” The composite economic indexes are the key elements in an analytic system designed to signal peaks and troughs in the business cycle. The leading, coincident, and lagging economic indexes are essentially composite averages of several individual leading, coincident, or lagging indicators. They are constructed to summarize and reveal common turning point patterns in economic data in a clearer and more convincing manner than any individual component – primarily because they smooth out some of the volatility of individual components. For more information about The Conference Board's global business cycle indicators go to: http://www.conference-board.org/data/bci.cfm.
After an almost picture-perfect January, the New Year has started to draw concerns after the negative activity in the markets these first days of February. However, the most recent economic data remains in positive territory and shows no warning signs of recession. We advise investors to remain focused on investment goals and avoiding overreacting to short-term noise. Maintaining a diversified global portfolio, with exposure to a variety of assets across geographies, classes and sectors, can help mitigate risks and reap benefits from areas of potential strength. Volatility is to be expected, and desired to some point as it can create investment opportunities for some. 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.