2017 2nd Quarter Recap & A Few Other Notes

SeanCommentary, Recent Highlights

The second quarter capped off a strong first half with another positive showing in every major equity asset class. As was the case in Q1, international stocks continued to outpace US stocks across the board, with some international indexes posting returns twice those of the Dow Jones or S&P 500. (Long live diversification!)

Asset Class[1]Q2 Return1st Half
Emerging Mkt Stocks6.27%18.43%
Int'l Developed Mkt Stocks6.12%13.81%
Dow Jones Industrial Avg3.95%9.35%
Pacific Stocks3.92%11.11%
S&P 5003.09%9.34%
US Real Estate2.59%5.89%
US Small Cap Stocks2.46%4.99%
5-Year US Treasury Bonds0.72%1.18%
US Inflation0.34%1.32%
1-3 Yr Global Bonds0.33%0.72%

Small cap and value factors, both of which have historically added to portfolio returns over time, underperformed a bit, but not dramatically, in Q2. US markets continue to be relatively expensive, although not exorbitantly so – at least not so given the low interest rate environment and the relative unattractiveness of competing bond returns. European holdings are still less expensive than their US counterparts, with Pacific markets even more so, and Emerging Markets are at least 35% cheaper than US or European developed markets, partially explaining their outperformance.

Market performance notwithstanding, economic indicators in the US and abroad continue to strengthen. This week’s US manufacturing index (ISM) rose to 57.8%, its highest level in three years. What’s behind that bump? A weakening US dollar (good for US exports), rising global growth and a solid U.S. economy. The most recent US unemployment rate posted a very healthy 4.3%, a 16-year low and a level considered to be at or near full-employment. Strengthening data in the 19-country Eurozone showed a similar trend, with Eurozone-wide unemployment hitting an 8-year low based on data also released this week.

And Now a Quick Reminder: Sometimes Market Corrections Happen

As it’s been a while since we’ve seen anything approaching a real market downturn – and since equity market volatility has been at a near all-time low, it’s probably worth a quick reminder that such things do occasionally happen, and when they do, panic-induced selling is not usually a helpful (or profitable) response. As we all witnessed in the 2007-2009 meltdown, staying in our seats with seatbelts fastened low and tight across our laps was a more effective – and in the end, more profitable – response than trying to exit the plane mid-flight.

And please don’t take this in any way as a prediction of imminent doom or as implying any message other than, “it’s been a while and nothing should surprise us anymore.” It’s always worth remembering that the reason equities have provided higher returns over time is precisely because of their volatility. Unpredictability and higher returns are two sides of the same coin and – for better or worse – they cannot be peeled apart.

DOL Fiduciary Rule Update

A quick note on the June 9th implementation of the Department of Labor’s fiduciary rule, which I wrote about last quarter. After much industry-wide gnashing of teeth and rending of garments, the Department of Labor implemented a fiduciary requirement on all workplace retirement accounts effective June 9th, and by extension, on all transactions related to retirement accounts, including IRAs. This will have relatively little effect on registered investment advisory firms like ours as we have been – and will continue to be – fiduciaries by choice of our SEC registration. However, this will have a substantial impact on wirehouse/brokerage firms, insurance companies and any firm or broker who operates on a commission basis. This explains why so many of these firms fought tooth-and-nail to derail the new rule.

The rule won’t be fully implemented until January 1, 2018 although the DOL has put out a request for information from affected parties and may consider modifications before the final implementation next year. Changes or not, the DOL seems to have raised enough awareness around the fiduciary issue that other industry organizations have taken note, and it may be too late to put the fiduciary genie back in the bottle. This is a good thing for the industry and for all clients. (It’s worth noting, too, that the rule does NOT impose a fiduciary requirement on non-retirement accounts for these firms; it only applies to retirement accounts. Again, though, The Retirement Planning Specialists is – and will continue to be – a fiduciary with respect to ALL client accounts, not just retirement accounts.)

Early Warning: Upcoming Website & Web Portal Update

By the time you receive the next quarterly commentary, we should have a new and improved website and client web portal, both of which are in process now. The website has been long overdue for a refresh, and is finally getting one, and likewise for the web portal. The website is being developed as I write this and the data conversion for the client web portal will begin later this month. Stay tuned for updates.

Finally, as we approach the mid-point of a dry summer here in Colorado, I hope it’s been an enjoyable one for you thus far. As always, please don’t hesitate to reach out with any questions or let us know if there is anything we can do for you.


[1] Indices used from top to bottom of list, all denominated in USD: MSCI EAFE Int’l Dev Mkts Sm Cap; MSCI European Stocks; MSCI Emerging Mkts; MSCI EAFE Int’l Dev Mkts; Dow Jones Industrial Avg; MSCI Pacific Stocks; S&P 500; Dow Jones US Real Estate; Russell 2000 Small Cap Index; Barclay’s US 1-5 Yr Treasuries; SBBI US Inflation; Barclays 1-3 Year Global Bonds; GSCI Gold Index; West Texas Intermediate Crude