Fixed Income Market Outlook – 4Q 2017

  1. Fixed Income Market Outlook – 4Q 2017

    Fixed Income Markets From the outside looking in, fixed income markets had a fine year. We enjoyed positive returns, abundant liquidity, and unusually low volatility. While we still expect positive returns in 2018, we see a changing narrative informing our view of what is to come. The fact is that 2017 ended much stronger than it began. After stumbling in the first quarter, GDP is now expected to notch its third consecutive quarter of 3%-plus growth when the fourth quarter is reported, something last seen in 2004-05. Consumer spending is up and manufacturers struggle finding workers to meet a growing demand. Tax reform is expected to provide additional funds for companies to direct towards investment and higher wages. Job growth is still expanding at a pace that will move the unemployment rate down. It would be faster still but for a continuing skills mismatch between hiring companies and the unemployed. And inflation, while still below the 2% target set by the Federal Reserve, will be pressured to higher levels in the coming year. There are also the actions of the Federal Open Market Committee (“FOMC”). They undertook three rate rises in 2017 and are currently forecasting three more for 2018. They also began reducing their balance sheet in October by $10 billion/month and will work their way up to $50 billion/month by the end of 2018. This represents an aggregate $450 billion reduction over 15 months, just a 10% slice from a $4.5 trillion pie. Too slow in our view. Even so, this action alone presents…

  2. Equity Market Outlook – 4Q 2017

    Equity Markets As we entered 2017, we thought conditions were ripe for positive equity returns; something on the order of 8-10%. It turned out substantially better, with all the major U.S. equity indices returning double digits for the first time since 2013, and international indexes doing even better. Our proprietary screening models are revealing more interesting companies from a broad range of sectors. For active managers like us, digging deeper reveals an even better story. As the year progressed and concerns of overvalution grew, we remained bullish. The economy was picking up. Jobs were still being created. Earnings were still strong and growing. And we continued to identify names whose value we felt was not fully reflected in their price. Valuations aren’t cheap, but we still define them as fair. We did witness periodic rotations from sectors that had done well (i.e., semi-conductors and software) to sectors that had lagged (retail and financials). For example, Amazon finished the year up over 50%, beating the S&P by 30%. Yet there were points where Amazon lagged the broader indices by more than 10%. The same thing happened with banks, retailers, semi-conductors and others. The Consumer Discretionary sector was the strongest in Q4, after posting the weakest returns in Q3, and Technology returns were among the strongest, again. Energy and Telecommunications, two sectors struggling with volatile commodity prices and intense competition respectively, were the only sectors to post negative returns for the year, despite turning positive in the second half. The widespread reach of automated trading programs and passive investors contributed to…