Weekly Market Commentary May 23, 2017
May 23rd, 2017 by Anchor Bay Capital's Investment TeamLast Week’s Market:
We saw the first sizable market pullback since September of last year as the S&P 500 fell 1.8% on Wednesday. The volatility was short-lived and overall the market finished slightly lower for the week.
Emerging Market indexes, an asset class that has been strong over the last year, struggled last week on news that the Brazilian President is implicated in a bribery scandal. Brazil is a large component of this asset class.
The bond market sent signals that expectations are high for a rise in short-term interest rates, effectively flattening the yield curve. These types of signals tend to implicate that there is anticipation that monetary policy will slow the economy.
Our View:
Overall, there are some mixed signals on the momentum of the U.S. economy as it heads later into this current business cycle. Today the Trump Administration’s budget was released projecting a target of 3% economic growth by 2021. While getting back to a 3% growth rate would be great for our economy, the combination of low unemployment and an aging workforce create some resistance to actually achieving this target. This growth assumption relies heavily on fiscal stimulus and it is becoming more and more of a question mark just how much reform and stimulus will actually get done this year. Despite this uncertainty, stocks are doing well with continued economic growth globally.
As we strategically allocate our portfolios between equities, fixed income and cash depending on the needs of the investor, we are constantly evaluating the current economic environment and its effect on the various asset classes. With this in mind, we are slightly over-weighted in equities vs. fixed income in our portfolios compared to a traditional asset allocation. Bonds provide stability and income in the portfolio, and we continue to hold short term bonds to minimize fluctuations. However with bond yields remaining low, a larger shift to consistent dividend paying stocks provides us with additional income and positions us to capture the current growth of the market.
Portfolio Insights:
Last week Ford announced significant layoffs as part of a plan to cut costs and boost efficiency in production. This was followed by the replacement of their CEO over the weekend. By allocating the cost savings to future development and hiring a new CEO that is a proponent of change, these efforts show that Ford is committed to investing in new technology and competing in the electric and self-driving car space.
We are looking at utilizing iShares® iBonds® ETF’s as part of our fixed income strategy. These exchange-traded funds allow us to build a short-term bond ladder by tracking indexes with specific maturity dates. As a complement to individual bonds, we find that these securities will allow us to manage interest rate risk and receive a monthly income payment.