Market Review from Sumner Wealth Management

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- DECEMBER 2016 -

 
 

 In This Edition:

  • 2017 Economic Outlook
  • US Economy
  • International Economy
  • My Thoughts
  • About SWM

 

 

Market Performance

Stock Market

NOVEMBER

 YTD

12 MONTH

 Total U.S. Market1 +4.32% +11.38% +8.73%
   Domestic Large Cap Equity2 +3.51% + 10.45% +8.30%
   Domestic Small Cap Equity3 +10.91% +20.17% +14.17%
 International Equity4 -2.90% +1.87% -0.51%
   Developed International Equity5 -1.99% -2.06% -3.32%
   Emerging Market Equity6 -6.74% +10.02% +4.76%

Fixed Income

NOVEMBER

 YTD

12 MONTH

 U.S. Bonds7 -2.86% +2.33% +2.09%
Cash Equivalent8 +0.01% +0.22% +0.24%
1Russell 3000 2S&P 500 Index 3Russell 2000 Index 4MSCI ACWI ex-U.S. Index 5MSCI EAFE Index 6iShares MSCI Emerging Markets Index 7Barclays Capital U.S. Aggregate Bond Index 8Barclays Capital 1-3 Month U.S. Treasury Bill Index   
 
 

Dear Visitor,

Markets fell last week in response to the Federal Reserve (Fed) signaling that it planned to raise rates faster than investors expected. The S&P 500 Index was basically unchanged, while small-cap stocks shed 1.7%. International developed markets lost 0.6% and emerging markets dropped 2.4%. Bonds continued to decline, falling 0.6%, and commodities declined 1.1%.

The Fed increased interest rates 0.25% at its December meeting, a move we had thought likely after it declined to raise rates in September. By the time of the meeting, this increase was widely expected. However, additional communication from the Fed about its expectations for future rates rattled markets.

2017 Economic Outlook

The base case is that there is a promising story to be told here. Fiscal stimulus—both in the form of targeted spending and tax cuts—could generate greater economic momentum and propel stronger global growth.

However, the risks to the world economy in 2017 have also increased because the tail risks are fatter. Global growth may heat up too much, too quickly, and raise inflation expectations. The Fed could find itself behind the curve with regards to managing inflation and be forced to tighten policy too rapidly. Higher interest rates could become a drag on this aging cycle. Fiscal stimulus could provide a near-term boost which then fades. Protectionist sentiment also casts its shadow as a threat to global trade.

In short, the risk of an economic “accident” looms large, particularly with the U.S. economy already flying at low altitude—perhaps too close to the ground for comfort.

Economy

The second estimate of 3Q16 GDP showed an acceleration in U.S. growth. From expanding at 1.4% last quarter to 3.2% q/q saar this quarter, the economy, while not racing ahead, is picking up steam. Gains in consumer spending, business fixed investment, inventories and exports were modestly offset by a decline in residential fixed investment and an increase in imports (which are a subtraction from GDP). Despite another small decline in oil exploration spending, nonresidential fixed investment on structures popped by 10.1% in the third quarter second estimate. The biggest shift in this report was a surge in exports, which grew by 10%, boosting the overall estimate of GDP growth by about one percentage point. So far, economic growth looks to be accelerating as expected in 2H16.

The November employment report narrowly missed expectations, with the U.S. economy adding 178,000 jobs and the unemployment rate dropping 0.3% to 4.6%. The wage picture was tepid, rising only 0.1% over the month for production and nonsupervisory workers but declining for the private sector overall. As the labor market continues to tighten, the biggest risk in 2017 is that inflation surges caused by stoking an already warm U.S. economy with fiscal expansion. However, continued low wage growth suggests this threat is currently under control

The 3Q16 earnings season saw overall earnings per share grow 13.8% year-over-year (90.4% of market cap reporting), the first positive growth in six quarters. Earnings rose a more modest 6.4% ex-energy, reflecting the strong contribution from energy companies, which benefited from more stable oil prices. This price trend, combined with more modest appreciation in the dollar, suggests continued upside potential for equities.

Inflation is rising. November consumer prices continued to firm on the back of rising energy and shelter costs; headline CPI grew by 1.7% y/y, while the core measure grew at 2.1% y/y, the same pace as in October. The first estimate of the Federal Reserve's (Fed) preferred measure of inflation, the Personal Consumption Expenditure (PCE) deflator, for 3Q16 showed the core estimate sticking at 1.7% y/y. Markets-based indicators of inflation are also picking up, suggesting even greater increases in prices in the early part of 2017. 

International

Markets recovered from the initial shock of the late-June U.K. referendum vote to leave the European Union, as lower bond yields, expectations of additional monetary accommodation, and stable global economic data soothed investor concerns. While global liquidity remained ample, monetary policy rates remained relatively unchanged during the quarter and bond yields rose modestly. Emerging markets (EM) and other non-U.S. equities led the broad-based rebound, although bond-proxy sectors such as utilities cooled off after a strong run of performance. China's stimulus-induced steadiness has helped stabilize the global economy, though the pace of growth remains slow and the U.S. and much of the world are in a maturing phase of the business cycle. We favor global equities and inflation-resistant assets, but smaller allocation tilts are merited at this point in the business cycle.

My Thoughts?

There is no question that interest rates have risen very quickly, with the US Ten Year Treasury Note yielding approximately 1.2 percent more than it did at its lows just six months ago. More rate hikes from the Fed are expected and being priced in. However, investors need to remember that expectations are not always realized. For example, while Fed projections are now looking for three rate hikes next year, at the end of 2015 the Fed was expecting to raise rates four times in 2016...and barely managed to raise them just once! Granted, the allure of fiscal stimulus is now being considered in a way that was certainly "off the table" in late 2015. However, the size of the stimulus remains in question. At 4.6 percent, the unemployment rate is at a cycle low, and Chart #1 shows how inflation expectations have recovered. Will President-elect Trump be able to enact all the stimulus he wants, given the risk of overheating the economy, let alone the impact such spending might do to the federal deficit. Without question, a key dynamic for investors to monitor in 2017 will be the interplay between the Fed attempting to gradually take its foot off the monetary policy accelerator, while the administration attempts to step on the fiscal pedal.

About SWM

Our firm assist individuals, families, and businesses in proactively preparing themselves for a broad range of financial decisions and life events by utilizing a team of specialized individuals to help our clients gain income protection, financial stability, and overall peace of mind for themselves and their loved ones.  We are an Integrated,  Wealth Manager Specialists. 


Mark Sumner
Financial Advisor

Sumner Wealth Management, Inc.                
517 Alcove Road, Suite 202                                            
Mooresville, NC  28117                      
(704) 660-5510  Ext. 401                                        
www.sumnerwealthmanagement.com                                  


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