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Wetherby Insight fourth quarter 2016 Wetherby INSIGHT Newsletter Highlights Investment Overview • The outcome of the U.S. election resulted in notable effects on capital markets around the world. Domestic equities staged a robust rally in anticipation of a pro-growth agenda During the fourth quarter, we hired James Von of the incoming presidential administration. Domestic fixed income markets experienced a sharp sell-off based on Kaenel, Software Analyst; and Reno Vieira Neto, expectations of increased inflation from higher spending and the Federal Reserve (Fed) interest rate hike. International Core Operations Associate. Welcome James and equities declined in U.S. dollar terms, in light of the prospect for a more protectionist stance in the U.S., as well as Reno! weakness in the local currencies in relation to the U.S. dollar. Lastly, energy commodity prices rallied based on the aforementioned factors. Simon Smundak, Senior Research Analyst, was • The new year, new president and new realities lead us to the following set of forecasts: the Federal Reserve will invited to become a shareholder of Wetherby continue to raise short-term interest rates in 2017 to a level below long-term averages, international central banks are Asset Management. Congratulations Simon! expected to maintain an accommodative monetary policy stance; longer-term interest rates will work their way higher; inflation in the U.S. will likely increase during the course of the year as a result of labor market constraints and more The following employees had five-year protectionist trade policy; and the U.S. dollar will likely remain strong versus major foreign currencies. anniversaries with Wetherby during the fourth • Coupled with these projections is the potential for more quarter: Jack Olson, Chief Financial Officer, Chief robust earnings growth of U.S. companies as a result of the pro-growth policies of the incoming presidential Compliance Officer, and Director of Operations; administration and lower corporate taxes. and Maria Pyatigorsky, Senior Investment • Commensurate with these emerging trends, we are cognizant of and vigilant about the associated risks. Among Associate. Congratulations Jack and Maria! them are the heightened uncertainty and coherence of potential policy changes of the incoming presidential administration; the looming risks of more conservative and nationalist governments in various European countries; Congratulations to Theresa Arroyo, Operations higher interest rates increasing the cost of servicing still elevated levels of sovereign debt; and the extended length of Manager, and her husband Greg, who welcomed the bull market in the U.S. coupled with elevated valuations. their new son Raylan Pierce Arroyo. • In light of these changes, opportunities and risks, we remain vigilant for investment opportunities across a global spectrum of financial assets. Wetherby Asset Management Fourth Quarter 2016 1 Commodity prices may remain volatile over the foreseeable Impact Investing Update future as the market attempts to balance opposing structural forces including potential OPEC output agreements, the • Wetherby employees participated in a series of community service events, including repairing and constructing trails weakening of globalization generally and the uncertainty of for Golden Gate National Parks, packing boxes of food trade policies under a Trump administration. at San Francisco-Marin Food Bank, serving meals to low Fixed Income: Fixed income markets sold off sharply after the income people with Tenderloin Neighborhood Development Corporation in San Francisco and working for the Good+ election, based on the premise that the new administration Foundation in New York to sort donations. would pursue reflationary fiscal spending. The Barclays U.S. Aggregate Bond index finished down 2.98% for the quarter and • Highlights are included from our annual survey of our up 2.65% for the year. The Federal Reserve (Fed) voted to raise employees’ individual sustainability practices, volunteerism the Fed Funds rate by 0.25% (25 basis points) in December and and philanthropic activities both to raise awareness of such signaled additional rate hikes in 2017. practices and to gather feedback on our team’s interests and priorities with regard to social and environmental issues. Table 1. Market performance, as of December 31, 2016 Financial Planning 3-Year 4Q16 1-Year • Our financial planning section topic is an update on long- Annualized term care insurance. The article includes ideas on how S&P 500 3.82% 11.96% 8.87% you can reduce the cost of premiums for a long-term care insurance policy if you feel that your premiums have MSCI ACWI ex-US -1.20% 5.01% -1.32% increased too much over time. MSCI EAFE -0.68% 1.51% -1.15% MSCI EM -4.08% 11.60% -2.19% Investment Overview DJ-UBS Commodities 2.66% 11.77% -11.26% By Andrew Pratt, CFA, Director of Research; and Nick Ongaro, Barclays Aggregate Bond -2.98% 2.65% 3.03% Senior Research Associate Source: MPI Stylus data through December 31, 2016 Fourth Quarter Market Recap Global Economy and Markets Domestic Equities: U.S. equities moved higher over the quarter on the coattails of the Trump election victory and a platform 2017 will no doubt prove to be an interesting year for investors, that promised both fiscal stimulus and lower tax rates for with the potential for changes in tax laws, new trade and corporations and individuals. Although these new policies are immigration policies, and regulatory reform under the new uncertain, and will likely take considerable time to implement, administration. While change appears inevitable, the timing, the U.S. equity markets reacted positively to President Trump’s scope and magnitude remain unclear. U.S. equity markets proposed initiatives. The S&P 500 finished up 3.82% for the already reflect a positive view of the influence of these quarter and up 11.96% for the year. The Dow Jones Industrial presumed changes on consumer and business fundamentals, Average finished up 8.66% for the quarter and up 16.50% for while domestic bond markets are beginning to price in some the year driven primarily by strong performance in the finance additional inflation. International stock markets reflect a sector. more complex and less optimistic outlook, with Europe still experiencing muted economic growth, concerns over the International Equities: Developed international equities future of the European Union (EU), and Japan still struggling as measured by the MSCI EAFE finished down 0.68% for the to revive its long dormant economy. Emerging markets had quarter and up just 1.51% for the year. Emerging Markets sold the first positive year since 2012 lead by commodity driven off after the election but finished up 11.60% for the year based countries. We look into the new year with cautious optimism largely on a rebound in commodities, including oil. Significant but with our usual analytical eye. With that, what do we think strength in the U.S. dollar throughout the year negatively will happen in specific areas of the markets in 2017? We will to impacted returns for U.S. investors in international markets. start by assessing the investment landscape and the changes that appear in store for investors over the next couple of years, Commodities: Energy prices sold off and then rebounded in the and conclude with our strategic response. fourth quarter. For the year, most commodities moved higher from the February lows. The Bloomberg Commodity index finished up 2.66% for the quarter and up 11.77% for the year. 2 Wetherby Asset Management Fourth Quarter 2016 Regarding Inflation, Interest Rates, the Fed and Figure 1: 10-Year Inflation Expectations the Dollar The Federal Reserve will continue to raise short-term interest rates in 2017. It seems likely that we will see two or three short-term rate increases before the Fed becomes more “data dependent” in the latter half of the year. We have been living with very accommodative monetary policy since 2009, and at this juncture we expect short-term interest rates to rise, although not back to historical levels (you should start earning more money on your money market fund in 2017). The Fed is simply moving interest rate policy back to something more “normal.” Central bank interest rate policy will be different in Europe and Japan where policy makers are likely to re- main more accommodative against a backdrop of more muted economic growth. Given that debt-to-GDP ratios are high in Source: Federal Reserve Bank of St. Louis absolute terms in Japan and close to maximum policy levels1 in Europe, it seems likely that continued monetary stimulus will Longer-term interest rates may rise this year as well, be the preferred policy prescription rather than fiscal stimulus. although without a major surge in inflation or growth the increase should be contained. The fact that higher short-term Inflation will probably continue to edge higher in 2017 after its rates may act as a potential growth constraint may actually long slumber, which may push longer-term interest rates high- put a cap on longer-term (10-year) yields, which sank to a low er. Medical care and housing costs are currently pressuring of 1.4% in 2016 and finished the year above 2.4%. See Figure 2. consumer prices upward and the labor market is tightening, Expect mortgage rates to rise in 2017 after a meaningful bump especially for skilled positions. The break-even or expected in Q4 2016. inflation rate implied by the spread between inflation-indexed and noninflation-indexed bonds rose from 1.4% to 2.0% in the second half of 2016. The good news is that the Federal Reserve has inflation fighting power, and it does not appear that prices Figure 2: 10-Year Treasury Yields will suddenly spike to the upside given that global growth is still quite tepid and because excess global manufacturing capacity still persists.
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