Quarterly Commentary

The Cornerstone Investment Commentary: 2nd Quarter, 2017

If the second quarter of 2017 were to be summed up with the title of a classic novel, it would definitely be Dickens’ “Great Expectations.”  The storyline would be about everything that was ‘supposed’ to happen to accelerate economic growth:  increasing consumer and infrastructure spending, rising corporate profits, strong job creation with rising wages and large tax cuts for both individuals and businesses.

Unfortunately, some of these disappointed as the second quarter unfolded, particularly the anemic 0.6% consumer spending rise along with a 25% cut in expected corporate profit growth for this quarter.  To be sure, these could all yet come to pass in dramatic fashion.  Of positive note, consumer confidence remains strong and the job market has rebounded from its early Spring lull.  This is good news since consumers routinely base spending decisions on what they believe they will earn.

For now, we’re seeing the impact we would expect:  U.S. equity (stock market) gains slowed by half to 2.9% from a robust 5.6% in the first quarter.  Particularly affected were growth stocks, which turned negative in June even as value stocks held steady.  None of this, however, has yet thrown cold water on the Federal Reserve’s plans for multiple interest rate hikes this year.  These will eventually throw at least a little cold water on the economy itself.

An opposite and positive effect occurred with international stocks (~25% of your equity holdings).  Not only is economic activity accelerating overseas, but more favorable stock price valuations made foreign stocks among the star performers thus far in 2017, collectively rising 14+% year-to-date in both developed and emerging stock markets compared to 8.5% for diversified U.S. equities.

All this suggests that your portfolio is well-positioned for the current situation, circumstances and uncertainties – be they economic, financial or political.  To review: 1) your foreign stock allocation is at its highest level in a number of years; 2) several changes we made since last October when interest rate increases were imminent have improved performance; 3) our over-weighting to value stocks still seems prudent, having been particularly beneficial in 2016’s second half (though not through May of 2017); and 4) your portfolio’s fixed income position is heavily weighted toward short-term bonds (< two years) in anticipation of further interest rate rises.

Of course, we will continue evaluating these positions in light of changing events and alert you should they warrant adjusting any of them.  Until such time, we invite your questions or comments as always.  And we send both our thanks for the continuing opportunity to work with you and our best wishes for an enjoyable summer.

Past Commentary