Now that tax season is behind us and Spring is in the air, let’s take a look at the first quarter of 2017 and the outlook going forward.
US stock markets got off to a great start in 2017 as both corporate earnings and economic data continued to improve. However, March was more volatile as President Trump was unable to pass a new healthcare bill to repeal and replace Obamacare. The inability to pass a new healthcare bill decreased hopes of a tax plan that would reduce both corporate and personal tax rates and bolster spending and growth to the US economy. Despite the March volatility, US stock indexes were still able to produce impressive returns of around 6% for the quarter.
Globally, economic conditions are improving and confidence that Europe is out of the financial crisis of a few years ago seems to be supported. As we anticipated and have discussed with clients, we are starting to see international stock indexes follow suit and rebound from an oversold position. On average, international stocks returned around 7% for the quarter and emerging markets return around 11%. This marks a shift from what has been routine US outperformance over the past few years.
For the first time in a while, it looks as though world economies are all heading in a positive direction and the fear of the US being dragged down is not a worry. Corporate earnings and economic data in the US show no signs of recessionary conditions and point to an improving growth environment.
A significant factor effecting whether we see muted or accelerated growth depends on the Republicans getting tax reform passed. After the election, the US markets experienced increased returns on the assumption that a Republican House, Senate and President would be able to pass such reform. If they do not, we could see a flat to declining US stock market since valuations have priced in such reform and would then look slightly overvalued.
We expect international economies to continue to show signs of improvement. The reaction to the recent election in France was positive and has invigorated the European region further. As international and emerging market economies continue to improve, it should be a growth catalyst to the US as long as trade policies are not changed in a way that hinders that possibility.
From a portfolio standpoint, we have discussed our views how US markets seem fairly valued and international markets may show signs of stronger growth as they rebound from the financial crisis of a few years ago. Our theory is starting to come to fruition and we believe that it should continue over the coming quarters. Although we do not see signs of recessionary conditions in the US and expect positive market returns, oversold conditions internationally may show better prospects for returns absent of a US tax reform policy.
We maintain our stance on the potential for increasing interest rates in the US. It is prudent being on the shorter side of duration, while seeking opportunities for yield in areas outside of treasury bonds or with higher yielding debt. We continue to believe that a portion of the portfolio should be in emerging market debt which provides not only diversification outside of the US, but also, quality yield.
VCM Balanced ETF Strategy
We are also pleased that our 4-Star Morningstar rated Balanced ETF Strategy has consistently outperformed its benchmark across the board on a YTD, 1-year, 3-year, 5-year and inception to date basis as of the end of the first quarter.
As always, I stress that in this ever-changing political and economic environment, sensible diversification is the key to weathering any market uncertainties.
Jason M. Vavra, CPA, PFS
The information contained herein is not considered an offer to buy or sell any securities referred to herein. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors. There is no guarantee that the figures or opinions forecasted in this report will be realized or achieved. Past performance is no guarantee of future results.