As I write this commentary at the mid-point of 2017, the markets have made steady progress in the first 6 months despite what has been an unpredictable and often concerning geopolitical environment around the world. I often tell clients and interested parties that unexpected events can have an impact on markets but they are generally short-lived. At the end of the day, the markets go back to being influenced by companies and their profits. That seems to be the case so far in 2017 as we get ready to celebrate with July 4th fireworks, even though every week is filled with news about our partisan politics or the latest terrorist incident.
In the U.S., the Federal Reserve (Fed) made good on raising interest rates. Unemployment is low, workers are producing goods and services and financial markets have responded in-kind. While somewhat different economic factors are in play, most overseas’ economies and financial markets are outperforming the U.S. Even bonds, an asset class most felt would lag as the Fed raised rates, have done well on a relative basis. These positive, broad market increases, are certainly welcome but investors should remain vigilant and not become complacent.
At the portfolio level, the 1st quarter was busy with tax and IRA activity. The 2nd quarter was spent rebalancing portfolios. With few exceptions, equities were trimmed and the proceeds added to fixed income and hybrid positions. With equity markets at all-time highs, good values were rare. We allowed some cash to accumulate and stayed disciplined around allocation targets when dollar cost averaging monthly deposits to investment accounts. Looking ahead, it is unclear what, if anything will push the markets higher during the second half of the year but we will remain patient when putting cash to work and will seek value when buying.
Portfolio holdings performed as expected and we remain pleased with the diversity being achieved by the current mix of investments. If there was a weak spot, it was energy and more specifically, oil. Oversupply has driven the price per barrel to historical lows. Efficient shale production is more immune to OPEC reductions therefore preventing meaningful price increases. This is good for consumers but bad for the price of oil and related investments. With no end in sight to the current supply/demand cycle, steps were taken at the close of the 2nd quarter to reduce direct exposure to oil and oil related industries by selling Guggenheim S&P 500 Equal Weight Energy ETF (ticker RYE). Proceeds from the sale of this energy specific holding were reinvested in the more broadly diversified PowerShares Dynamic Large Cap Value ETF (ticker PWV). PWV has energy exposure but on a significantly smaller scale relative to its other holdings.
While reticent on the merits of the Congressional and Special Counsel Hearings, they seem to be doing a good job of diverting resources away from the important issues of healthcare and tax reform along with infrastructure spending. How these initiatives play out in the coming weeks and months may do more to influence market performance than fundamental valuations and underlying economic conditions. Post-election, all were thought to be catalysts that would move markets higher. Being a speculative barometer, equity markets moved upward over a relatively short period of time on the assumption that a Republican controlled Congress and Executive Branch would push them through. A majority of mid-year technical data suggest a continuation of positive market returns during the latter half of 2017 but if the aforementioned initiatives are postponed further or legislative changes fail to meet expectations, don’t be surprised if markets respond with an equal and opposite decline before year-end.
Pleased with how investments are performing and knowing the portfolios are well diversified, we don’t expect many changes to portfolios. If markets move higher, we will look to trim equity positions and purchase bonds. If markets move down creating value in certain companies, sectors or geographic areas, we will assess whether or not it makes sense to buy on the dip. Regardless of direction, we will remain grounded around each client’s allocation strategy mirroring their tolerance for risk.
Have a great summer!