3Q17 Market overview
We wrapped up another unusually calm and prosperous quarter although investor skepticism grew along with geopolitical tensions. Leading the concerns was North Korea’s missile testing and dictator Kim Jong Un’s heated exchanges with President Trump. Fortunately, the foreign relation tension was overshadowed by the improving global economic backdrop which rewarded our diversified long-term investors as they celebrated the general direction of the markets and their rising portfolio balances. Every major market index was positive with international markets experiencing more optimal results with the help of a softening U.S. dollar.
As we close out the year in anticipation of additional Fed monetary policy tightening and market volatility, we will continue to take advantage of diverging market trends by rebalancing to target allocations while maintaining your desired risk level and fulfilling your cash flow needs. This process typically involves harvesting gains or losses in the most tax-efficient manner possible and then re-allocating the proceeds to out of favor asset classes that offer more attractive long-term opportunities such as international equities and bonds. This process is likely to become more interesting and challenging in the months ahead as our government tries to reach an agreement on any meaningful change. So far, they have been unsuccessful in finding common ground on health and tax reform issues.
U.S. Equity Markets
The U.S. equity markets advanced during another quiet quarter; the Russell 3000 increased 4.6% for the quarter and healthy 13.9% year-to-date return. The post election boost to consumer and business confidence continued with the help of steady corporate profits without signs of any pending recession. Investors continued to focus on vigorous consumer spending, low inflation and a maturing economic recovery rather than the renewed enthusiasm about possible tax reform. On the job front, the U.S. Bureau of Labor Statistics reported that the unemployment rate ticked down to 4.2% in September even though the economy shed 33,000 jobs. The job loss can be directly attributed to hurricanes Harvey and Irma which displaced over 100,000 leisure and hospitality positions. As companies report their latest earnings, we will focus on guidance related to rising employment and interest rate costs to determine how this might impact future profits given the tightening labor market and Federal Reserve plans to increase rates one more time before year-end. These pressures could lead to increased volatility, especially if top line revenue growth doesn’t live up to expectations.
International Equity Markets
International developed equity markets continued their impressive run with a 5.4% quarter gain and 19.9% year-to-date return for the MSCI EAFE. In Europe, an improving labor market has led to a rebound in consumption and consumer confidence. In response to these positive developments and stronger corporate profit growth, ECB President Mario Draghi put the markets on notice to expect a further reduction in expansionary monetary policies. Japanese equities also had a solid quarter as global growth helped boost exports to an annualized growth pace of 18%. Prime Minister Shinzo Abe called for an early election to take advantage of his popularity spike to win additional support for his platform that includes strengthening Japan’s economic footing, stronger diplomacy in dealing with North Korea threats and education spending. China’s economy surprised on the upside by posting an envious 6.9% annualized pace in the first half of 2017 which is on track to exceed its growth target goal of 6.5%. With the world’s top economies expanding, emerging markets (MSCI EM) added 7.9% during the quarter as they increased production to keep up with export demand and further support the impressive 27.8% year-to-date gain. Both developed and undeveloped international markets continue to look much more attractive from a valuation perspective compared to U.S. equities.