Summer 2017

Quarterly Commentary

Summertime often gives investors time to pause, relax and reflect on a year that is already half gone. Money managers are no different. We could pat ourselves on the back for a first half 2017 that has exceeded most of our expectations. However, that is not our nature.

While we remain a bit cautious waiting for stock fundamentals to validate these strong returns, we are optimistic as we still do not see rampant exuberance typical of a market top. In fact, we believe that if we can get Congress to do their job and give investors a pre-Christmas tax reform package, it is very possible that this market will extend its advance and upward trajectory. Our team believes it is a matter of when, not if. This bodes well for second half 2017. Apply that sunscreen!

Economy Positives

Strong Payrolls = Green Light for Equities?
The June Payroll report at +222,000 new jobs was much stronger than expected. Importantly, the April and May reports were modestly revised upward as well. Jobs gains are a rather reliable barometer for near-term U.S. economic growth.

Millennials and their new white picket fences!
U.S. household formation is surging at 1.22 million units. Supply is scarce as this younger generation that has preferred urban living is moving outward to the suburbs. As a result, household formation is closing in on more normal levels.

The Wealth Effect is alive and well.
With the stock market and home values on sustained upward paths, consumers are becoming more confident on our economic trajectory. Lower oil and gasoline prices have also put more money in their pockets and improved confidence levels.

Economy Negatives

Retailers (ex-Amazon) are in the infirmary!
As a whole, traditional brick-and-mortar retailers have lagged their primarily-online counterparts rather dramatically. Many have closed their doors or have been forced to be purchased by larger competitors.

Secular forces are keeping inflation low
Average hourly earnings at +2.5% (versus +2.6% last reading), a key gauge to measure U.S. economic growth, remains stubbornly low. We believe that technological advancements and slack in the labor force are keeping AHE from accelerating.

Is another housing bubble in the cards?
With rates still near multi-decade lows and pockets of high-end real estate near all-time highs, we are keeping a keen eye on these markets and bank loan delinquencies. We have not forgotten that when rates rise these R/E areas decline first.

Financial Market Negatives

The timing of fiscal stimulus is concerning
We are increasingly concerned that Congress has a hard time getting out of its own way. However, important issues such as healthcare and tax reform do take time. Markets will become impatient without something done near-term.

Look out for Summer seasonality!
As investors hit the beach, we anticipate greater volatility in the markets due to lower-than-average trading volume. As opportunistic investors, we will look to take advantage by adding quality companies to our equity portfolio at better prices.

Geopolitical risks on the rise.
North Korea’s July 4th test launch of Hwasong-14, an intercontinental ballistic missile capable of reaching Alaska and Hawaii, opened the eyes of world leaders. We expect continued economic and trade sanctions but that region of the world remains a wild card.

Financial Market Positives

“We are near the ‘neutral rate’!”
Fed Chair Janet Yellen’s recent statement to Congress caught the markets by surprise. Markets had anticipated a few more interest rate increases through 2018. ‘Low rates for longer’ are positive for U.S. stocks when compared to alternative investments.

Fundamentals do matter
There is a strong correlation between corporate earnings growth and the S&P 500 Index. Second quarter earnings are expected to be up 9.9% this quarter and some strategists have S&P 500 earnings estimates has high as $138 per share this year!

Investor pessimism is a positive!
Investors continue to pull money out of stocks (-$422 billion) and pour it into bond funds / ETFs (+$1.649 trillion) since the 2008/09 financial crisis. We believe money will return to stocks as our economy strengthens and interest rates normalize.