Pulse Points > October Investments & Market Update

Gill Capital Partners October 2017 Market Commentary

One of the funny things about the stock market is that every time one person buys, another sells, and both think they are astute.” – William Feather

Q3 2017 Market Review

The third quarter largely saw a continuation of the upward trend in equities and most other asset classes. Equities have continued to post gains in the face of a litany of negative geo-political headlines and natural disasters. Markets continue to be buoyed by healthy corporate earnings, a stable and friendly interest rate environment, an ever improving employment market, and non-threatening inflation reading. Emerging market and international equities led the gains for the quarter once again, with emerging market equities up nearly 30% for the year. U.S. equities are also having an outstanding year, up between 10% and 15% year to date. Bonds, as represented by the Barclays Aggregate Bond Index, are up over 3% year to date. Asset allocation has continued to work in 2017, and it has paid to stay invested despite the negative headlines.

What are we talking about at Gill Capital Partners?

We would like to thank all of our clients and partners who were able to attend our annual educational luncheon with Jeffrey Kleintop, the Chief Global Investment Strategist at Charles Schwab. We are honored to be able to host such a high profile and engaging speaker, and we hope you all enjoyed the thought provoking discussion as much as we did. For those of you who missed the luncheon, below is a summary and a few key takeaways.

Jeff Kleintop is responsible for providing research, commentary and actionable insights to help individual investors and their advisors understand the significance and financial implications of events and trends worldwide. You may recognize him, as he appears regularly on news networks like CNBC and Bloomberg TV to share his thoughts on the global investment climate. Recognized by the Wall Street Journal as one of “Wall Street’s Best and Brightest,” he is also the author of the book “Market Evolution: How to Profit in Today’s Changing Financial Markets.”




Jeffrey Kleintop Presentation Overview

Are things too good? Many investors believe the economy and market performance have been too good for too long and are concerned that a correction is imminent. Not so fast! Jeff and the Charles Schwab research team are actually the most positive they have been on the overall investment landscape since 2010. Why?

  • For the first time in 10 years, every major economy in the world is growing.
  • They expect this to continue for at least the next year.
  • They believe the biggest risk for investors is putting too much emphasis on political risk.
  • Earnings growth is solid and they believe that the trajectory will continue, at least for the next four quarters.

Are we on the cusp of a recession? The best leading indicator of a recession is the yield curve; specifically, the difference in yield between a 10-year Treasury and a 3-month Treasury.

  • The best indicator of a forthcoming recession is an inverted yield curve; that is, the yield on a 10-year Treasury falls below that of a short maturity Treasury, such as the 3-month or 2-year.
  • The yield curve has inverted 7 times in the past 50 years, and each time the economy fell into recession within one year.
  • Currently the yield curve is not inverted, though it is flattening.
  • The yield curve is telling us that the bond market does not see a recession in the next 12 months.

Are there bubbles forming in certain areas of the market? What constitutes a bubble? Past bubbles have generally taken ten years form and have posted returns during their formation of roughly 1,000%. The technology, homebuilder stocks, and oil bubbles have all been consistent with this pattern. Given this information, where might the bubbles be today?

  • Bitcoin – Bitcoin has appreciated about 1,000%, but has only taken 2 years to do it. This certainly appears to be a bubble, but Jeff does not believe that Bitcoin is imbedded in the global economy such that it will be impactful if and when it deflates.
  • Internet Retailers – The stocks of internet retailers, as measured by the S&P 500 Internet Retail Index, are up 1,700% in nearly nine years. However, Jeff does not believe that this is a bubble, but rather a fundamental shift in consumer behavior.
  • ETF Assets – Is passive investing a bubble? Equity ETF net assets are up over 500% in the past 9 years. Jeff does not believe this is a bubble, but another fundamental shift in investor behavior toward passive, low-cost investing.
  • In summary, Jeff does not see any major bubbles currently that would represent a significant risk to the global economy if they were to pop.

Where to invest now? Are stocks too expensive? Are bonds?

  • Jeff and the Charles Schwab research team are positive on this market.
  • They do not see a recession coming in the next 12 months.
  • Valuations are okay; they’re not great, but they’re not terrible.
  • There are currently no major bubbles forming that could derail the expansion.
  • They continue to like equities, and particularly international and emerging market equities.

The Gill Capital Partners’ Investment Committee is in general alignment with Jeff and the Schwab research team, and can report that our client portfolios are positioned consistent with this thinking. To those of you who were able to attend this great event, thank you and we hope you found it valuable. For those of you who were not able to attend, we hope this summary provides some good insights into the markets.

As always, please let us know if you have any question or concerns, or if we can provide assistance with any other financial planning matters including education, taxes, insurance or estate needs.

BlogJames O'Brien