Global equity markets had an extremely positive 2017 with many indices reaching historical or recent highs. The anticipated correction from overbought levels never occurred due to a steady stream of positive economic reports which addressed concerns regarding downside risk. Equity markets marched on with conviction supported by a combination of continued economic growth and positive expectations moving forward. A recent analysis of the DJIA’s 2018 earnings estimates creates a target of 21,400 and a surprising 23,400 support level based on 2019 projections. Although this represents a potential 15% correction from current levels to the 2018 target, it is still within a healthy trading range void of any long-term concerns as long as the economy stays on track.
Growth oriented companies outperformed their value counterparts in 2017 due to improving GDP reports and revisions. Our confidence in the global economy is genuine but our memories of the Tech Bubble and the Financial Crisis continue to influence our investment approach. For the last several years, we have overweighted value stocks relative to growth stocks to protect the downside. This approach worked surprisingly well in 2016 when our value positions exceeded return expectations but is one of the factors contributing to a drag on portfolio results in 2017 relative to the blended S&P 500.
Our confidence in the transition from an interest rate driven market to a market driven by economic growth continues to solidify, resulting in a cautious transition towards an equal weighted ratio of growth stocks to value stocks. Should a pullback or correction occur, the pace and magnitude of allocating to growth stocks may increase as long as economic conditions remain intact. It is highly recommended that you reach out to your consultant to discuss any possible portfolio adjustments specific to your situation relative to our Capital Market Expectations.
Our allocation to fixed-income is the other factor which contributed to a drag on overall portfolio returns. The re-emergence of downward pressure on bonds, REIT’s and utilities occurred during the fourth quarter as the Fed followed through on the rate increase in December. With the yield on the 10 year note currently around 2.5%, we maintain a belief that rates should not spike. We will continue to closely monitor possible inflationary factors recognizing that strong unemployment figures and improving GDP figures have not recently translated into higher inflation. Additionally, we believe the upcoming discussions regarding infrastructure spending may be a possible concern for fixed-income and the direction of interest rates.
It goes without saying that Tax Reform will have an impact on Capital Market Expectations. It is a relatively easy task to determine how companies within certain sectors & industries will immediately benefit on the bottom line due to Tax Reform and proposed deregulation. However, the real challenge exists in determining how new guidelines may impact revenue growth over time. This is another factor that we will continue to monitor as an indicator of GDP trends.
We are excited to announce the addition of Katelyn Baehrle to our team. Continuing our commitment to clients as the firm grows, Katelyn will play a vital role in the operations department. You can meet her at this year’s first Round Table Discussion which has been scheduled for April 18th. The location is yet to be determined as we seek another facility to meet the growing number of attendees. Please contact Leslie Tritschler at: 484-320-6300 for additional information or to reserve a seat at one of our client events.
