Friday, March 31, 2017

2Q-17 Investment Meeting Summary


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

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