Our Chief Investment Officer, Eric Cramer, gives a brief overview of what to expect for the Q2 2017 Market Reports.
Thanks for listening today. Please join us for one of several upcoming BIP Q2 2017 Market Report presentations.
QUARTERLY MARKET REPORT LUNCHES
APRIL 26 AT 12:00PM
MAY 4 AT 12:00PM
MAY 10 AT 12:00PM
APRIL 27 AT 12:00PM
MAY 9 AT 12:00PM
MAY 11 AT 12:00PM
QUARTERLY MARKET REPORT WEBINAR
The first quarter of 2017 generated an above average return for most stock market indexes, with the MSCI ACWI IMI Net Global Equity Index rising 6.79%. This seemingly positive signal for future economic growth was accompanied by a slight fall in intermediate to long-term interest rates, which is usually interpreted as a negative outlook for growth. The Bloomberg-Barclays U.S. Fixed Income Aggregate Bond Index returned a comfortable .82%, including a bump of approximately .15% from the falling rate effect.
This lack of clear sentiment in the markets is being attributed by many to uncertainty in the future direction of national policies on healthcare, taxation, infrastructure spending, national defense, and immigration. As we said last quarter, we still don’t know if the most important political battles in Washington will be between the two dominant political parties or between factions of the Republican party. Only time will tell.
This is not the first quarter in recent history that market prices have sent mixed signals to investors. And the traditional approach of measuring how markets perform, in order to divine the direction of the future economy, may have reached its end for now. We believe that politically driven decisions on spending and taxes will have ever more profound effects on the performance of capital markets.
For instance, if investors sense that corporate tax cuts will become a reality, then the value of stocks may rise rapidly. And if investors sense that corporate interest payments on borrowed money may no longer be tax deductible, then the supply of credit bonds might shrink and rates could plummet.
Until these issues are settled, the market doesn’t seem very interested in monetary policy. Predictions of future increases in short-term interest rates don’t seem to worry investors at all, unlike what we saw prior to the elections. Maybe this is reasonable—most finance models for corporate capital spending don’t change much until overnight rates get above 3%. But it’s also widely rumored that the Federal Reserve will begin to shrink its balance sheet later in 2017. This potential extra supply of fixed income instruments into the market should be sending intermediate rates upwards. And yet those same rates fell in Q1.
We also believe that fiscal policy’s effect on the national debt could become a larger and larger concern for the markets, and we will continue to report on the effect of policy decisions on the projected future levels of debt. The possibility of increasing levels of Treasury sales to finance a rapidly growing national debt could send intermediate and long-term rates skyrocketing.
A prolonged and unrestrained increase in debt financing by the national government that leads to higher rates could kill the housing recovery, leading to investor losses in fixed income and equity markets in the same period. This is the so-called “nightmare scenario” for investors because diversification within public markets and a balance between equities and fixed income won’t help very much.
Economic growth remains the great unsolved variable in all these possible equations for the future. In the past, higher rates of growth have come from technological innovation and increasing productivity, which may not be as linked to government policy as political leaders would like to suggest. It is impossible to know what the next major leap forward in capitalism may be, so for now our projections rely too much on the past. But it is always true in any scenario we can contemplate that higher rates of growth solve a lot of problems.
In summary, we have more questions than answers about the future direction of the global economy. So far in 2017 volatility has remained low, but we are warning investors that there are multiple reasons for markets to start jumping around a lot more than we are used to since the recovery from the Great Recession took hold in the spring of 2009.
Thanks for listening today. This is Eric Cramer, Chief Investment Officer at Buckhead Investment Partners. Goodbye for now and I look forward to seeing you at one of our upcoming Quarterly Market Report lunches, or on the webcast.
Disclosure: This communication contains general investing information that is not suitable for everyone and is subject to change without notice. Past performance is no guarantee of future results and there is no guarantee that any views and opinions expressed will come to pass. The information contained herein should not be construed as personalized investment advice, tax advice, or financial planning advice, and should not be considered a solicitation to buy or sell any security. Investing in the stock market and the bond market involves gains and losses and may not be suitable for all investors. The Global Equity index is the MSCI ACWI IMI Index, which is a free float-adjusted market capitalization weighted global index selected as the best available proxy for a diversified stock portfolio consistent with modern portfolio theory. Approximately 55% of the index is comprised of the U.S. stock market and 45% is comprised of international stock markets, including both developed and emerging countries. The “Net Total Return” version of the index is reported here, which means the index reinvests dividends after the deduction of withholding taxes, using a tax rate applicable to non‐resident institutional investors who do not benefit from double taxation treaties. The U.S. Fixed Income index is the Bloomberg Barclays Capital U.S. Aggregate Bond Index, which is a broad-based benchmark selected as the best available proxy for a high quality, diversified fixed income portfolio suitable for a U.S. investor. It is comprised of the Barclays Capital U.S. Government/Credit Bond Index, the Mortgage-Backed Securities Indices, and the Asset-Backed Securities Index. It is an unmanaged market value-weighted performance benchmark for investment-grade fixed-rate debt issues, with maturities of at least one year, and an outstanding par value of at least $100 million. The “Total Return” version of the index is reported here, which means that dividends are included and reinvested. It is not possible to invest directly in this or any other index.