Up, Up and Away
Another quarter and another new high. Even though the markets were relatively muted in June, the markets as measured by the Dow, S&P 500, and NASDAQ all ended at new highs. Year to date, the indices are up 8.0%, 8.2%, and 14.1% respectively. Oil services, financial companies, and the retail sector have lagged this year while tech has outperformed. The five major tech stocks that lead the charge are known as the FAANG stocks, Facebook, Apple, Amazon, Netflix and Google.
Year-to-date exchange traded funds (ETFs) showed large inflows and continue to outpace individual stocks and mutual funds purchases. In fact, $98B in new purchases were made in the first quarter alone through ETFs, accounting for the majority of market purchases. This means the rally we have seen has not driven by a few hundred stocks, rather it has been a broad rally across multiple sectors.
Beyond Our Borders
Given the rise in US equities we believe they are fairly valued at these levels. However, there appears to be an opportunity in international developed and emerging market equities. The price to earnings ratio of international stocks appear more favorable than US stocks. Last year, US stocks appreciated by 12% after the elections but international stocks as measured by the MSCI EAFE index lagged, up only 1% in comparison. Assuming the risk-relationship continues with historical norms, international stocks are overdue for a rally. As if on cue, 2017 has been great for international stocks. The MSCI EAFE index is up 14% as of the end of June.
Emerging markets such as Brazil, India, and China appear attractive as well. As with emerging economies, there is a certain level of political risk involved with investing. These nations tend to be export heavy, the economic success of the country depends on world trade. Even with the talk of US tariffs, we still find this asset class attractive due to its underperformance over the last ten years and current valuations.
The Fed Minutes
The Fed recently released its minutes from the June meeting. It was no surprise the Fed decided to raise rates for the second time this year and we will likely see another rate hike before the end of the year. What made headlines was the minutes showed disagreement between the board members on how to unwind its balance sheet. The proposed plan is to reduce the balance sheet by $10 billion per month and then slowly ramp up to $50 billion per month in quarterly installments. Some members suggest starting the reduction before the end of the year, as early as September, while others would prefer to see another rate hike before the reduction. These numbers sound big but we do not expect it to have much effect on the economy. The current balance sheet is about $4.5 trillion in assets so the $10 billion per month is a proverbial drop in the bucket. The unwinding is going to take a while. Maybe this time, the economy is strong enough to stand on its own without Central Bank support.
Archvest’s New Reporting Look
We’ve updated the look of our Quarterly Performance reports. The reports now reflect the modernized look of the Black Diamond portal which we rolled out in 2016. Additionally, we updated the performance figures to show gross of fees. We decided to make this change to standardize our reporting as some of our clients have ask us to invoice them directly while for others we invoice the accounts we manage. We hope the change to the new portal is more intuitive and responsive for you, and that the reports are easier to review. If there are any questions about navigating the software, or on your reports please give us a call.
As always, if you have any questions or concerns please give us a call. Be sure to follow us on Facebook, LinkedIn and Twitter as well as our RSS feed to stay up to date on what we’re reading and thinking.
Eric Lai and John Wenzel
Eric Lai & John Wenzel | Archvest Wealth Advisors