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ECONOMIC & MARKET REVIEWFIRST QUARTER 2017

april 2017INVESTMENT MANAGEMENT

INVESTMENT MANAGEMENT | ECONOMIC & MARKET REVIEW | FIRST QUARTER 2017

ECONOMIC & MARKET REVIEW

ECONOMY

GROSS DOMESTIC PRODUCT (GDP)

NONFARM PAYROLLS

-10

-8

-6

-4

-2

0

2

4

6

Oct-16Apr-16Oct-15Apr-15Oct-14Apr-14Oct-13Apr-13Oct-12Apr-12Oct-11Apr-11Oct-10Apr-10Oct-09Apr-09Oct-08Apr-08Oct-07Apr-07

Qua

rter

ly C

hang

e at

an

Ann

ual R

ate

-1000

-800

-600

-400

-200

0

200

400

600

Jan-17Jan-16Jan-15Jan-14Jan-13Jan-12Jan-11Jan-10Jan-09Jan-08Jan-07

Mon

thly

Cha

nge

in T

otal

Em

ploy

men

t

Source: U.S. Department of Commerce: Bureau of Economic Analysis

Source: U.S. Department of Labor: Bureau of Labor Statistics

While first quarter 2017 GDP hasn’t yet been published, GDP came in at a 2.1% pace for the fourth quarter following a stronger 3.5% annual rate in the third quarter. Exports and federal government spending were among the negatives in the quarter, but consumer spending, residential construction and state and local government spending were among the positives. The slow growth of the economy in recent years has been

a disappointment, but it partly reflects an aging population and slow productivity gains that help limit growth potential. Going forward, Fed officials believe the long run rate of economic growth to be about 2% or so in their economic projections, so at 2.1%, economic growth is in line with its long term trend. Business investment in equipment and technology may increase growth potential.

Job gains in the past quarter have been steady, with moderate to strong job gains each month, while the unemployment rate remained at or near a very low 4.7% rate, even as more people entered the labor force to start (or restart) their job search. Average hourly earnings – a key metric for bolstering consumer spending – increased by 2.8% from a year ago. While this may seem on the low side, inflation has also

been extremely low, so real (net of inflation) hourly earnings growth has actually been above much of this series’ history. Job gains have been spread across occupations with a variety of pay scales, including higher income jobs as well. Job growth has been so strong that some industries have reported a shortage of qualified workers, including manufacturing and construction.



BONDS

TEN YEAR U.S. TREASURY YIELD

BofA MERRILL LYNCH US CORP AA TOTAL RETURN INDEX VALUE

0

1

2

3

4

5

6

Mar-17Apr-16Apr-15Apr-14Apr-13Apr-12Apr-11Apr-10Apr-09Apr-08Apr-07

Perc

ent

0

100

200

300

400

500

600

700

Mar-17Apr-16Apr-15Apr-14Apr-13Apr-12Apr-11Apr-10Apr-09Apr-08Apr-07

Inde

x Va

lue

Source: Board of Governors of the Federal Reserve System

Source: BofA Merrill Lynch

A big impetus towards higher yields came with the election of Donald Trump to President, with his campaign pledges to boost growth, which may require more borrowing to finance spending, along with higher inflation, both of which may send yields higher. Indeed, up to the end of the fourth quarter, the yield on the 10-year Treasury note initially increased to about 2.6%. However, during the first quarter,

doubts began to emerge on the likelihood and timing of this “reflation” trade, and yields drifted lower to about 2.4%, marking a relatively tight trading range for the first quarter. Potential risks include whether inflation might emerge, or the Federal Reserve provide for a more rapid pace of allowing its balance sheet to shrink, or the European Central Bank end its stimulus program earlier than the market expects.

Falling bond yields means rising bond prices. Longer term bonds are generally more sensitive to changes in interest rates than are shorter term bonds, with prices increasing more when rates fall. Corporate bonds also have a component built into their yield that reflects investors’ degree of optimism (or concern) about the credit quality of the bond in question. In tandem with a rising stock market, investors

also bid up the prices of corporate bonds relative to Treasuries, making this difference in yields, or the credit spread, tighter than it had been. That means that many corporate bonds are priced for a low-risk environment. Going forward, this tight credit spread might limit outperformance potential of corporate bonds versus Treasuries.



0

500

1000

1500

2000

2500

Mar-17Mar-16Mar-15Mar-14Mar-13Mar-12Mar-11Mar-10Mar-09

Inde

x Va

lue

0

20

40

60

80

100

120

Mar-17Mar-16Mar-15Mar-14Mar-13Mar-12Mar-11Mar-10Mar-09

Inde

x Va

lue

STOCK MARKET

S&P 500

WILSHIRE 5000 TOTAL MARKET FULL CAP INDEX

Source: U.S. Department of Commerce: Bureau of Economic Analysis

Source: Wilshire Associates Incorporated

During the fourth quarter, investors were cheered following the election of President Donald Trump, given his campaign promises that some see as increasing economic activity, perhaps benefiting corporate earnings. There are many reasons to be optimistic about the economy, but some analysts think expectations have gotten a bit ahead of themselves. That means that, while expectations are for

the economy and earnings to grow, some analysts think investors may have already priced that (and more) into the markets, making valuations relative to both sales and earnings for many stocks a bit stretched. Whether measured on a price to earnings basis or price to sales basis, many stocks may be pricey, though not uniformly so.

As noted with the commentary on the S&P 500, stocks of all stripes had benefited from the “reflation” trade, with investors expecting the economy and earnings to expand while inflation returns. While those expectations may now already be priced into shares, with major stock indices at or near record highs, some value stocks may still be attractive relative to their book value, for example. Some growth

stocks, meanwhile, are very dependent on getting the earnings growth that is built into their share prices. That growth is, after all, why investors are willing to pay up for a stock. Forecasts are for a surge in earnings in coming quarters – far beyond what would be typical of a modestly growing economy. We may indeed see that earnings growth, but if we don’t, the market could be vulnerable.



SUMMARY

POSITIVES NEGATIVES

EARNINGS GROWTH MAY

ACCELERATE, WHICH MAY

JUSTIFY HISTORICALLY

EXPENSIVE VALUATIONS.

THE ECONOMY IS GROWING

AT A MODERATE, BUT STEADY,

PACE, WHICH MAY LIMIT

RISING INTEREST RATES

ANY FISCAL STIMULUS MAY

HELP ECONOMIC GROWTH

AND PROFITS FURTHER

STOCKS ARE EXPENSIVE, SO WITHOUT EARNINGS GROWTH,

STOCKS MAY BE VULNERABLE

GEOPOLITICAL RISKS EXIST IN MULTIPLE AREAS OF THE GLOBE

UNCERTAINTY REMAINS ON TIMING OR SIZE OF ANY TAX

CUTS, IF ENACTED



SOURCESAll data in this document is obtained from the St. Louis FRED database, including data originally reported by the Bureau of Economic Analysis at the U.S. Department of Commerce, the Bureau of Labor Statistics, S&P Dow Jones Indices, Wilshire Associates, the U.S. Board of Governors of the Federal Reserve and BofA Merrill Lynch.

DEFINITIONSThe S&P 500 is regarded as a gauge of the large cap U.S. equities market. The index includes 500 leading companies in leading industries of the U.S. economy, which are publicly held on either the NYSE or NASDAQ, and covers 75% of U.S. equities. Since this is a price index and not a total return index, the S&P 500 index here does not contain dividends.

The Wilshire 5000 measures the performance of almost all U.S. common equity securities, and so serves as an index of all stock trades in the United States. The returns we publish for the index are total returns, which include reinvestment of dividends.

The BofA Merrill Lynch US Corporate AA Index value, a subset of the BofA Merrill Lynch US Corporate Master Index, tracks the performance of US dollar denominated investment grade rated corporate debt publically issued in the US domestic market. This subset includes all securities with a given investment grade rating AA.

DISCLOSURESUnited Capital Financial Advisers, LLC (“United Capital”) provides financial life management and makes recommendations based on the specific needs and circumstances of each client. For clients with managed accounts, United Capital has discretionary authority over investment decisions. Investing involves risk, including possible loss of principal, and clients should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. The information contained in this piece is intended for information only, is not a recommendation to buy or sell any securities, and should not be considered investment advice. Please contact your financial adviser with questions about your specific needs and circumstances.

The information and opinions expressed herein are obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. Opinions expressed are current as of the date of this publication and are subject to change. Certain statements contained within are forward-looking statements including, but not limited to, predictions or indications of future events, trends, plans or objectives. Undue reliance should not be placed on such statements because, by their nature, they are subject to known and unknown risks and uncertainties. Investing strategies, such as asset allocation, diversification, or rebalancing, do not assure or guarantee better performance and cannot eliminate the risk of investment losses. There are no guarantees that a portfolio employing these or any other strategy will outperform a portfolio that does not engage in such strategies. Tactical Asset allocation strategy is not for every investor due to its potential higher tax liabilities.

Past performance is not indicative of future results. An investor cannot invest directly in an index. Moreover, indices do not reflect commissions or fees that may be charged to an investment product based on the index, which may materially affect the returns presented.

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