Right now the pace of global
growth continues to remain sluggish due primarily to slowing growth in China,
slow growth in Europe, and recessionary conditions in many emerging market
countries. The U.S. remains one of the strongest of the major global economies
growing at a pace of 2-2.5%. Slow global growth combined with a strong dollar
has negatively impacted U.S. corporate earnings growth over the past few
quarters which has been a hindrance for the U.S. stock market and a
contributing factor to the recent market correction. The good news is the U.S.
market appears to be recovering from its recent correction (now up 12% since
the mid-February low) due to improving investor sentiment towards the U.S.
economy. The outlook for both European and emerging market economies remains
poor at this point.
The Federal Reserve came out
with surprisingly dovish commentary following the March FOMC meeting. The Fed
held off on a second Fed funds rate increase we believe due to concerns about
slow global economic growth and disrupting other global monetary policy
activity, particularly Europe, which is experimenting with negative interest rates
to stimulate bank lending. While we expect the Fed may raise rates one or two
more times this year, we would not expect these rate increases to derail the
secular bull market in stocks as long as inflation remains moderate (which we
expect) and economic growth continues at a moderate pace.
With respect to changes resulting
from our meeting, the most significant change was our increase in weightings in
value stocks. We did this across all equity categories because a) value stocks
have underperformed growth stocks for a considerable period and therefore offer
opportunity; and b) if corporate profit growth remains subdued, value stocks
should have a greater opportunity for valuation improvement relative to growth
stocks which are currently richly valued. The increased emphasis on value
actually increased our overall equity exposure by about 2%.
Other significant changes
following the meeting include slight increase in our weightings in natural
resources/commodities including a new position in industrial metals (XME). We
think industrial commodities offer value because of the severe decline they
experienced over the past year as a result of concerns over a global recession.
With respect to fixed income, there were no significant changes. We slightly
reduced our weighting in both the long and short end of the yield curve. We
remain essentially neutral in both the long and intermediate portion of the
yield curve and overweight the short end. We continue to utilize corporate
bonds for fixed income exposure due to their higher coupon yield and higher
income to your portfolio.
3-24-16
