We held our second quarter investment strategy meeting on
March 28, 2017. If I had to pick one word to encapsulate the meeting, it would
be “steady”. For 2017, we continue to expect moderate, steady GDP growth and
moderate inflation, both in range of 2-2.5%. We see a moderate but steady
improvement in European economy. We see Federal Reserve policy remaining steady
with the likelihood of two more interest rate hikes this year. U.S. corporate
profits are now back in a growth mode and we expect further improvement over
the next several quarters. Valuation at 18x forward earnings is somewhat
elevated, but not at levels that would prevent further improvement in stock
prices, in our view. Overall, the fundamentals for the U.S. stock market remain
constructive, in our view.
On the fixed income side, we believe interest rates will
continue a gradual increase in 2017 based on slightly stronger GDP growth and
Fed policy. As a result, we continue to keep bond durations on the shorter end.
We continue to underweight long duration and overweight shorter duration as a
way of mitigating the impact of rising interest rates on fixed income
investments. While we expect rates will rise, inflation still remains moderate,
which supports our view that the rise in interest rates should be gradual.
With respect to changes in investment holdings, the theme
here is also “steady”. We made no changes to individual ETF holdings; and macro
allocations to the both equity and fixed income remained very close to last
quarter with aggregate equity allocation up slightly and fixed income remaining
the same. Within equities, we continue to favor value over growth because we
believe value stocks could perform better in a rising interest rate environment
due to their perceived stronger cash flow relative to growth stocks. Our
allocation to international stocks remained virtually unchanged while our allocation
to real estate (REITs) was reduced slightly due to their perceived interest
rate sensitivity. We continue to maintain a position in the biotech industry (IBB)
as we believe it offers attractive value within a growth industry. We also
maintained a position in homebuilders (ITB) as we believe a) the sector remains
significantly under-built in this economic cycle and b) the group continues to
present attractive relative earnings potential.
Bob Toomey, CFP®/CFA®
Vice President, Research 
