2018: FIRST QUARTER IN REVIEW
Michal Emory, CFA, Vice President & Chief Investment Officer, and Eli Sallman, CIMA® , CFP®, Vice President & Investment Officer – Portfolio Manager
Moving to the second quarter of the year, the economy is expected to maintain its course of relative strength. However, if news out of Washington continues to concern investors, market volatility is likely to prevail. Our thought is that most of the volatility and recent downward pressure on stocks is self-inflicted. While the economy, in general, and companies, in specific, are growing at a nice clip, investors are being distracted by the constant barrage of noise coming from Washington and the media. There are plenty of reasons to be excited about the economy as the effects of the new tax bill are working their way through it. Companies should see a boost to their earnings and cash flows not just from a strong economy but from the tax bill. Families should be seeing a boost, as well, as the lower tax rates put more in their pockets. With the pullback that we have seen, the stock market no longer looks expensive. As of this writing, the Forward P/E for the S&P 500 was 17.1X next year’s earnings. While that is not cheap neither is it expensive. We continue to see more value in stocks than most other asset classes which is reflected in our continued overweight position to equities. Growth continues to outperform value and we remain overweight growth for the time being. We continue to overweight Foreign Developed Equity Markets and Emerging Equity Markets. Valuations overseas remain attractive and U.S. returns in Foreign Markets could continue to benefit from the weakening dollar. We have increased our U.S. Small Cap position to a neutral weighting. Between Small Caps underperforming the past couple of years and Small Caps, generally, being less impacted from a potential trade war, now looks to be a good time to increase our positioning in that asset class. We continue to be underweight U.S. Fixed Income. As the Fed is raising rates on the short-end, the long-end of the yield remains stubbornly quiet. At the start of December 2015 when the Fed started its current rate hike campaign the 2-year Treasury was at 0.93% and the 30-year Treasury was at 2.97%. As of the close of the first quarter of 2018, the 2-year Treasury was at 2.27% and the 30-year was at, wait for it, 2.97%. There can be, and is, many reasons for this flattening of the yield curve. Since rising rates are bad for bond prices, longer maturity bonds have held up relatively better than shorter bonds thus far in 2018. Despite the noise from Washington and the increased volatility, we remain positive on the economy and stock market. Certainly, anything can and will happen but we remain vigilant in monitoring our asset allocation and security selection within that asset allocation.
Click here to view or download a printable file of our Q1-2018 Investment Management Update.
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