Back in Balance
November 2017 Market Report and Commentary

Should I stay or should I go? Lyrics from an iconic ‘80s song by The Clash capture the tangled emotions of investors as 2017 draws to a close. The markets have been booming; should you stay all in, pull back, get out? Fortunately, your strategy is unaffected by emotions or sentiment. More about what to do now, after a look at November numbers. 

 

Note: We’ll include charts in our end-of-year summary. 

 

The S&P 500 stock market index and the MSCI All Country World Equity index (ACWI) both notched a 13th consecutive month of positive total returns.

 

Corporate earnings set a record in Q3 2017 and are expected to set another one in Q4 2017. The economy continues to look healthy, headline inflation and stock market volatility remain low, and interest rates are expected to move up slowly.

 

The S&P 500 index returned 3.07% for November. The YTD return for the index was 20.49% and the one-year return was 22.87%. The S&P Small Cap 600 index continued to be volatile, posting a 3.52% return in November after returning 0.95% in October and 7.71% in September. For the three-month period, the small-cap index outperformed its large cap brother but underperformed it YTD. Over the longer three and five-year periods, the small cap index outperformed the large cap index by 2.34% and 1.13% per annum, respectively. 

 

The MSCI All Country World Equity Index (ACWI) returned 1.94% in November after returning 2.09% in October and 1.93% in September. For the three-month period, the ACWI returned 6.06%, versus 7.65% for the S&P 500, leaving the non U.S. version (ACWI ex-U.S.) of the benchmark with a 4.62% trailing three-month return. YTD, however, the ACWI ex-U.S. benchmark outperformed the S&P 500 index by 3.92%. 

 

The MSCI Emerging market index continued to be volatile, posting a minor 0.20% return in November, after adding 3.51% for October and subtracting -0.40% in September. The YTD return for the emerging market benchmark index was 32.53%. The one-year return was 32.82%. Over the two-year period, the emerging market benchmark returned 20.00% per annum.

 

The international developed MSCI World ex-US equity index posted a 1.00% return in November after returning 1.38% in October and 2.64% in September. For the three-month period, the international developed benchmark returned 5.12%, underperforming US stocks in general. However, YTD and for the trailing one-year period, the international developed benchmark outperformed the broad US stock market, returning 22.58% and 26.61%, respectively. 

 

Interest rates finished mixed across the board for the US fixed income market in November. The yield on the 5-year Treasury note increased 13 basis points (bps) to 2.14%. The yield on the 10-year Treasury note increased 4 bps to 2.42%. The 30-year Treasury bond yield decreased 5 bps to finish at 2.83%.

 

The yield on the 1-year Treasury bill rose 19 bps to 1.62%, and the 2-year Treasury note yield rose 18 bps to 1.78%. The yield on the 3-month Treasury bill increased 12 bps to 1.27%, while the 6-month Treasury bill yield increased 16 bps to 1.44%. Bond prices moved in the opposite direction of interest rates. High yield bonds lost 0.26% and intermediate-term corporates lost 0.32%. Municipal bonds lost 0.82%. 

 

 

The strong market performance of 2017 surprised many pundits and delighted investors. The bull market that began in 2009 had already run a long course in January, the same month that a spectacularly unpredictable new administration took office. Bombastic rhetoric, nuclear war threats, and criminal investigations have done little to dampen the party mood. But sober minds ask, how long can it last? 

 

Growth data offers some direction. GDP has been moderate in the US, estimated by economists to be 2.2% in 2017 and projected to rise to 2.5% in 2018. Globally, the OECD projects 3.6% global economic growth in 2017 and 3.7% in 2018, close to the 1990-2007 average. Good. Not great.

 

Do you see a glass half-empty or half-full? Business and consumer polls show optimism about the economy, despite persistent concerns about stagnant wages, productivity problems, cascading public and private debt, and an unsettled geopolitical environment. The glass half-empty scenario sees an economy that may be thinner than data reveals, a Q3 GDP that’s unlikely to be repeated, and markets that are overdue for a correction. The glass half-full side points to a world economy that’s improving, a tax cut that could propel American businesses to new heights, and plenty of room for growth at home and abroad. 

 

Tax reform, which has not been finalized as I write this, may indeed have a positive influence on stock market returns and economic growth. If the economy grows stronger, it’s possible that interest rates will rise faster than expected and/or inflation will heat up. Existing bonds could see rates fall, while new bonds would offer higher rates welcomed by investors. This all seems reasonable, perhaps even probable, but tax reform may also have unintended consequences that we can’t yet visualize. 

 

Let’s stop guessing about when market direction will change, and get down to how to protect yourself before it does. In investing there is always an expected premium relative to risk, which is why stocks outperform bonds over time. What’s important now is to consider asset allocation, the best tool for managing risk exposure. 

 

For most investors, a shift of a few percentage points in stock/bond allocation isn’t of concern. But shifts in double digits, particularly if you’re older, nearing retirement, or depending on fixed income, may signal a need to rebalance. The equity run-up has been steep: If you held a 60/40 stock/fixed income portfolio on 31-Dec 2008, your asset allocation shifted to 80/20 by 30-Nov 2017, nine years later. 

 

How well you adhere to your asset allocation over time is more important than what your exact allocation is, says efficient-frontier theorist William Bernstein. It is fundamentally a tool for staying on course. A steady tiller, if you will, in shifting winds. If your portfolio has drifted, it’s a good time to consider rebalancing if you haven’t done so already. We are ready with investment recommendations, guidance on fixed income, and tax planning. Do you have questions or concerns? Contact me. I am here to help.