Monthly Markets Memo - October 2017
by Dan Zalipski, CFA & Scott Rosenquist, CFA
Equities here and abroad continued their march higher over the past month backed by strong earnings and solid economic reports. Returns were especially strong with smaller companies who stand to benefit from potential tax reform. The small company index, measured by the Russell 2000, was up about 4.7% over the past month. Emerging markets also performed well, with the Emerging Market index adding about 2% over the past month.
Investment grade corporate bonds and high yield bonds both came out positive over the past month. Treasuries struggled to stay positive as yields moved higher, pushing prices down. Commodities were slightly positive, helped by oils rise above $50.
Around the World
The annual meeting of the World Bank Group (WBC) and International Monetary Fund (IMF) was held this October in Washington D.C. The meeting is a gathering of the financial world’s most influential people from around the globe, including central bankers, ministers of finance, private and public-sector executives, and academics. Topics of discussion focus on world economic outlook and development.
News was mostly positive with the global economy expected to expand at 3.6% in 2017, and 3.7% in 2018. Several major economies, notably Japan, Europe, and China, received an upgrade of forward looking expectations. “The global recovery is continuing, and at a faster pace,” said Maurice Obstfeld, director of the research department for the IMF. Central banks would seem to agree with this sentiment. The Fed began reducing its balance sheet this month and the European Central Bank (ECB) also announced they may begin reducing their own stimulus programs, both of which endorse a stronger global economy.
Even with the good news, the IMF still looks to identify and monitor risks that pose a threat to the global economy. These threats include policy errors related to central banks adjusting or reducing their respective stimulus programs, which could lead to a premature tightening of financial conditions. Other threats include the potential disruption brought on by a trade war as the U.S. looks to renegotiate NAFTA, or an actual war should the situation on the Korean peninsula deteriorate. Despite these risks, conditions for global economic growth are the strongest they have been since 2009.
The IMF reduced its economic forecast for the U.S. citing “significant policy uncertainty” regarding tax reform. Their forecast excluded potential tax benefits, bringing estimates for U.S. GDP to 2.2% for 2017 and 2.3% for 2018, down from 2.3% and 2.5%. The IMF chief economist expressed concern regarding any increase in the deficit, which is likely to be a highly contested issue within the tax reform legislation. Investors will be closely watching the progress as they attempt to determine the potential impact to the economy and markets.
The labor market in the U.S. shows signs of continued strength with recent jobless claims hitting their lowest level in decades. Labor market strength and positive global economic data should continue to support equity markets in the U.S. and abroad.
“The current global acceleration is also notable because it is so broad-based, more so than at any time since the start of the decade.” - Maurice Obstfeld, Economic Counsellor and Director of Research at the International Monetary Fund
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendation for any individual. Although general strategies are revealed, this post is not intended nor does it reflect transactions within any one account. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All data and information is gathered from accurate sources but is not warranted to be correct, complete or accurate. Statistical data has been obtained from sources including https://www.imf.org and www.morningstar.com.