2017 has proven to be another strong year for U.S. equities so far. The prospect of tax cuts, infrastructure spending, regulatory relief and trade negotiation have all contributed to a tailwind for corporate earnings. We believe that the market has priced in many of these factors and in turn, has responded positively.
The unemployment rate dropped to 4.5% in March, the lowest in nearly a decade. Wages and salaries are up 5.5% in the past year, higher than current inflation. Both are good news. However, we expect the Fed will raise interest rates again which will put pressure on fixed income. Given the current interest rate environment, we still like short duration bonds to minimize interest rate risk.
As we look forward, it becomes important to search for continued growth globally. Over the next decade, about 150 million people will enter India’s workforce. That is about the size of the entire current U.S. working population. We believe this shows that large corporations are gathering more traction internationally through internet exposure and rising wealth in developing countries.
As investors, the smartest thing we can do is remain focused on our long-term goals and time horizons. Subtle changes to portfolios help us account for individual client needs as well as changes in the global economy. Remember, disciplined investing and portfolio design that anticipates change will remain essential for achieving our long-term goals.
Mid-Year 2017 Investment Outlooks are:
· International Investing: U.S. stocks have risen nearly 250% since 2009, more than double the returns of international stocks. While we will continue to invest in the U.S., we also see current value overseas.
· Global Diversification is Key: While U.S. equities outperformed in the ‘90s, international equities outperformed in the ‘80s and much of the 2000's. Blended portfolios are able to benefit from both environments.
· Fixed Income: For non-qualified (non-retirement) portfolios, tax-free municipal income is a smart way to generate tax-efficient income. For qualified (retirement) portfolios, low-duration and tactical bond funds can be a prudent approach for diversification and relative safety.