Perspective, Provided

A Guided Path Informs Your Decisions

June 14, 2018 |

Small U.S. companies were leaders in the month of May, up more than 6%. Growth companies within the U.S. and abroad continue to outperform their value counterparts, as the Technology sector (+7.4%) had another strong month of returns.  U.S. equities have been supported by an economy that continues to grow at a moderate pace with strong manufacturing and low unemployment, down to 3.8%, which is the lowest level since the 1960's. Non-U.S. equities faced headwinds over the past month. Continued tariff rhetoric has spoked fears of an escalating trade war. Political concerns in Italy, which caused some to question the future of the EU, have been eased for now as a deal to form a coalition government was agreed upon. Emerging Markets were dragged down by Argentina, Brazil, and Turkey. Recent dollar strength and rising U.S. rates have put pressure on dollar denominated EM assets, causing concern that certain countries might have difficulty paying back dollar denominated debts. The next meeting of the Federal Reserve FOMC is scheduled to begin on June 13th, and arkets expect another 25 basis point increase in the federal funds rate.

May 4, 2018 |

The U.S. economy expanded at a 2.3% annual rate in the first quarter. While this beat analyst expectations, growth was at a slower pace compared to the 2.9% rate seen in Q4 2017. The economy continues to plod along with consumer sentiment elevated and unemployment low. Yields across the curve continued to increase and the 10-year Treasury crossed the 3% mark in April for the first time since 2014. Expectations of increasing inflation pressures have pushed yields higher so far this year with rates up around 0.5% from year end. Earnings growth for members of the S&P 500 have been strong so far this year. With just over half of members reporting results, 79% of companies have beaten EPS expectations. The market response so far, however, has been muted. Oil prices surged over the past two months, partly due to falling inventories and continued strong demand from a growing global economy. OPEC extended their production cuts which should also support higher prices over the near term. Increasing oil prices have helped fuel a rebound in energy associated companies, with the S&P 500 Energy sector up over 9% in April.

May 1, 2018 |

The first quarter of 2018 was tough for investors. After a relatively calm 2017, where it seemed like the momentum of investment returns could not be stopped, volatility made a comeback causing most major indices to finish negative for the quarter. Both the S&P 500 Index and the Bloomberg Barclays US Aggregate Bond Index (Agg) finished the first quarter of 2018 with negative total returns, in part due to rising interest rates, inflation scares, and tariff talks.

While volatility can create an uncomfortable environment, what’s worse is when investors feel like they have nowhere to “hide” and both stocks and bonds decline in value. Looking back over the past 30 years, it is actually a rare occurrence for both the S&P 500 and Agg to have negative returns in the same quarter in part because stocks and bonds have experienced low to negative correlation, at least this has been the case recently. In fact, Q1 2018 was the first time since the third quarter of 2008 where both indices had negative total returns in the same quarter. In the past 30 years this has only happened eight times!

In response to the markets’ recent behavior we took a deeper dive into the data to review how these two asset classes have behaved in relation to one another historically by comparing the monthly returns of the S&P 500 to the Agg. Our concern was that the diversification benefits of stocks and bonds might have diminished, leading us to question whether bonds will be a reliable hedge for equities over the next few years as the Fed continues down the path to normalize monetary policy. Historically as investors have become fearful and sold equities they have flocked to bonds as a safe haven. With a muted return outlook and continued rising rates on the horizon this may not be the case over the next few years. 

March 7, 2018 |

The month of February started with a changing of the guard as markets sold off and volatility made its way back into the conversation. The S&P 500's run of consecutive positive monthly total returns came to an end, though markets still remain in positive territory for the year. U.S. government bond yields increased across the curve. Congress passed a two year budget deal that will raise government spending following the passing of the $1.5 trillion tax cut. Fears of inflation pressures picked up with strong wage growth reported and unemployment remaining low. Investors have linked increased inflation fears as one of the triggers causing the market sell off earlier in the month. A more hawkish tone from the Fed's new leader, Jerome Powell, is causing some forecasters to now expect four rate hikes in 2018 compared to three previously assumed. Stimulative fiscal policy continues to lead Fed officials to report that the economic outlook remains strong. Further rate hikes could cause additional market volatility as the Fed works to deter the economy from overheating. A 25 basis point rate increase is expected in March.

February 12, 2018 |

China for many centuries was the World’s largest economy until the United States bumped it from its pedestal.  In the near future it is likely that China will regain its title of largest economy in the World.

We believe the construction of the World indices may be causing investors to have a truly underweight position to China.  Just like any investment, we must consider the return potential and the risks.  For investors that can get to know the risks of investing in China, they will better be able to determine the risk/reward payoff and will likely be at an advantage relative to most.

February 5, 2018 |

In light of recent market activity, Pathstone’s Chief Investment Office is sharing the enclosed market update.

February 1, 2018 |

Equity markets got off to a fast start in January with most major indices rising. The S&P 500 Index posted another month of positive total returns, the 15th month in a row. U.S. GDP grew by 2.6% in Q4, lower than the 3% consensus expectation. Consumer spending and business investment in equipment were both strong, however, inventory drawdown and net imports both weighed on growth. The 10-yr Treasury yield increased to 2.7%, its highest level since April 2014. Despite this increase the yield curve still remains relatively flat. International and Emerging Market equities continue to benefit from strong global economic growth. Further weakness in the U.S. dollar has also boosted returns for domestic investors. As expected, on January 25, the ECB announced that they would maintain current monetary policy. Mario Draghi, President of the ECB, said he sees “very few chances” that interest rates will be raised this year. Low rates and solid economic momentum should continue to be supportive for Euro area equities. Within the U.S., the Federal Reserve maintained the Federal Funds rate at current levels. The next meeting is scheduled to begin on March 20th.