Monthly Outlook: June 2017

Maybe we should just turn off the news since markets just don’t seem to care about any of it. No matter what happens, or may happen, markets seem to float a little higher each month. May was yet another positive month for gains so yes, we’ll take it. U.S. stocks (Russell 3000) gained another 1.0% in May while international stocks (FTSE All‐world ex‐USA) added an impressive 3.4%, mostly from European stocks. Bonds did their part, providing stability and modest gains, adding 0.7% total return. Just like last month, we remain heavily invested with little cash reserves in light of the continued uptrends. If we ever get a pullback in stocks of say, 3% to 5%, we’d use that opportunity to put the little bit of cash we do have into more U.S. stocks. But for now, we’re very well invested and capturing the growth that these markets are giving us. As we move into summer, we’ll stay invested but very watchful for any trend changes.

Beneath the Headlines

The major indexes, like the Dow Jones Industrial Average, S&P500, or NASDAQ, make headlines every day as barometers of “the market.” That’s understandable, but they really don’t tell the whole story and they don’t tell you how your diversified portfolio should have done. The Dow is only 30 U.S. stocks. That’s right, just 30 out of the 5,000 listed U.S. companies. So it’s our least favorite. The NASDAQ is a bit better with 100 stocks in its index but it’s highly concentrated in U.S. technology companies. 57% of the companies in the NASDAQ 100 index are technology companies and the top 5 holdings (Apple, Microsoft, Amazon, Facebook, and Google) represent 42% of the entire index. So it’s really just a concentrated tech index. Lastly, the S&P500 is just that, 500 diversified U.S. companies. It’s the best of the 3 as a proxy for U.S. stocks. For our purposes, we use an even better index, the Russell 3000, which includes 3,000 U.S. companies. But even still, we have to remember that all of these indices are just for the U.S. stock allocation of your portfolio. If you’re in our iFolios Growth model, for example, remember that you
have only 42% in U.S. stocks. (The rest is in bonds, international stocks, and maybe a little cash for liquidity purposes). So when you hear “S&P500 was up 10 points or .4%” that only tells you how 42% of your portfolio should have done. Apples and oranges.
The second point I’d like to point out about “beneath the headlines” is that we analyze what’s moving within the indexes. When markets are red hot and in “risk‐ on” mode, everything tends to move higher in unison. Financials, Healthcare, large company or small, it doesn’t matter; they all move up. That was happening for the past several years but not as much currently. Through May, 2017, for example, the tech sector is up 17.3% but the energy sector is down 12.6%. Mega‐ size companies are up 8.1% but small‐cap companies are only up 1.4%. So you can see that there is a lot more going on beneath the headlines. That suggests to us that while the indexes are continuing to rise, they might not be as strong or long‐lasting as we would like. We’ll continue to watch and trade accordingly.

Don’t Forget About Bonds

All of our blended portfolios, ranging from Stability to Aggressive Growth have a mix of Stability assets (mostly bonds) and Growth assets (mostly global stocks). It’s the growth assets that are exciting and provide the big returns from time to time. But let’s not forget about bonds. They provide stability, income and sometimes growth, and they dampen month‐to‐ month volatility. So far this year, bonds (Barclay’s Aggregate Bond Index) have returned 2.3%. That’s a steady contribution for five months. More importantly, bonds are again up‐trending (above their moving average) and so we extended the average maturity in client portfolios from about 4 years to about 7 years in May. Longer‐term bonds not only pay a bit more interest, but their price moves higher if interest rates trend down. While we don’t usually talk much about stability assets, we’re actually pretty excited that bonds look like a promising part of the portfolio right now and are likely to contribute to overall performance. For now, we remain cautiously bullish on both bonds and global stocks. Up, Up!