3 Observations on Q1 and Thinking Forward

Wednesday, April 12, 2017 |

Recapping what happened in Q1 with a focus on the quarters and years ahead:

  1. From a broad asset class standpoint, EEM (iShares MSCI Emerging Markets) returned about 12%.   India and Mexico were the best performers.  Developed International Market stocks, as measured by EFA (iShares MSCI EAFE), was also positive around 7%.  This plays into theme I have mentioned before: USD bull market is losing steam and attractive valuations.  Markets are discounting mechanisms, so with the path of interest rates set and plenty of bad news priced into International stocks, the equities are easier to price and the news need only to be slightly less awful to see in increase in price.
  2. The S&P 500 was up over 4%; however, was flat in March.  The market has become more expensive as forward earnings have not increased along with price.  While not speculative, we are at the highest level since the correction.  In the near-term stocks appear to be ahead of themselves as the glow of possible Trump stimulus fades.  I wonder if that is the pause we saw in March.  There is a smaller probability that we have a speculative drive higher.
  3. The bond market as measured by AGG (iShares Barclays Aggregate Bond) was up almost one percent.  Ultimately interest rates will move up over time, but this quarter is a good reminder that the move likely won’t be straight up and choppier.  Consensus has consistently been calling for higher rates only to rebuffed year after year (e.g. the 10 Year was down 10 bps this quarter).


Xhart Source: Yahoo! Finance; EEM (iShares MSCI Emerging Markets), EFA (iShares MSCI EAFE), SPY (SPDR S&P 500).

An exchange-traded fund (ETF) is a security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange. Investors must buy or sell ETF shares in the secondary market with the assistance of a stockbroker. In doing so, the investor will incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.

International investing involves special risks, including, but not limited to, currency fluctuations, economic instability, and political uncertainties, not typically present with domestic investments.

Morgan Stanley Capital International (MSCI) EAFE Index (Europe, Australasia and Far East) is an index created by Morgan Stanley Capital International (MSCI) that serves as a benchmark of the performance in major international equity markets as represented by major MSCI indexes from Europe, Australia and Southeast Asia.

The MSCI Emerging Markets Index is an index created by Morgan Stanley Capital International (MSCI) and is a float-adjusted market capitalization index that is designed to measure equity market performance in emerging markets. It consists of indices in 23 emerging market country indexes: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Thailand, Turkey and Arab Emirates.

S&P 500 Index is an index of 500 of the largest exchange-traded stocks in the US from a broad range of industries whose collective performance mirrors the overall stock market. 

Barclays U.S. Aggregate Bond Index is a composite of four major sub-indexes: US Government Index, US Credit Index, US Mortgage-Backed Securities Index, and US Asset-Based Securities Index, including securities that are of investment grade quality or better, have at least one year to maturity, and have an outstanding par value of at least $100 million.

The bond market is volatile and carries interest rate, inflation, liquidity and call risks.  As interest rates rise, bond prices usually fall, and vice versa.  Change in credit quality of the issuer may lead to default or lower security prices.  Any bond sold or redeemed prior to maturity may be subject to loss.

Investors cannot invest directly in an index. Past performance is no guarantee of future results.

The views and opinions expressed herein are those of the author(s) noted and may or may not represent the views of Capital Analysts or Lincoln Investment.