The third quarter of 2017 was one for the record books with the S&P 500 posting its first positive September since 2013 and closing at a record high. In addition, the Dow posted its first consecutive 8 quarter positive streak in 20 years. A strong September pushed US markets higher on the heels of firmer global inflation readings, the hope for US tax cuts and a stronger US dollar.
As a whole, we continue to see improving economic and corporate conditions globally. VCM has made comments during recent quarters that we anticipated outperformance in foreign markets once signs of growth and stability appear consistent. The expectations seem to be becoming reality as global markets have continued to outperform domestic markets. We continue to believe this trend will continue as the US markets appear to be fairly-valued while foreign markets are still early in their recovery from the most recent global financial crisis.
In spite being in one of the longest bull market runs in history, we believe conditions still favor a positive environment for equities. Corporate earnings continue to improve, fixed income yields remain low, economic growth is being seen in all areas of the world, and the Federal Reserve does not see signs of an over inflating economy. All are positive signs for the market.
With so many signs pointing towards equity markets continuing their run, we do caution that over-exuberance can cause these markets to over-inflate which could lead to a pull back. Pull backs tend to occur in any extended up, or down, market cycle. That said, it doesn’t appear conditions supporting a large pull back currently exist. Other factors that could throw headwinds into the market include ongoing tensions with North Korea or the failure of the government to pass any sort of tax and/or heath care reform.
Corporate earnings are expected to continue to be positive, but any significant misses or evidence of a slowdown, could lead to a pullback. VCM monitors economic and other leading indicators for trends. Our focus will also be on the Federal Reserve and their ability to unwind the US balance sheet without causing a recession.
From a portfolio standpoint, we continue with our stance that international markets are undervalued compared to US markets. However, we still believe that US markets will be positive based on the factors discussed earlier. We do not see signs of recessionary conditions in the US that would cause a change in our current opinion. The 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 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
Our Balanced ETF Strategy continues to outperform its benchmark on a 1-year, 3-year, 5-year and inception to date basis as of the end of the third 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.