November 2016 Financial Markets Summary

The PDS investment team recently met with colleagues and a knowledgeable investment company specialist.  Most of the discussion evolved around economics: inflation, interest rates, GDP, and global currencies. The specialist’s viewpoints:

  1. Inflation is soon going to be easily above 2% and likely moving closer to 3%,
  2. The 10-year Treasury (currently at 1.7%) is likely to be close to its historical 2.5% to 3% in a matter of months,
  3. GDP in the U.S. seems stuck in the 1-2% range, with little expectation for change, given the anti-business sentiment in the Washington bureaucracy,
  4. The Fed must increase rates based on its inflation and unemployment targets, and
  5. China is in much better economic condition than the media would have us believe.

We come back from these meetings with one goal in mind:  If one or more of these things WERE to happen, should we make changes to client portfolios. Is there evidence of these already occurring? For example, in the last month alone, long-term bonds have lost almost 2-3%.  By contrast, short-term bonds have held their values.  This would indicate that higher rates are already anticipated.  As our clients know, we have been shortening the average maturities and durations of our bond positions for more than two years.  We believe we have a handle on rates, but we may need to make future changes, too.

Higher inflation is most likely inevitable.  There were no surprises that inflation tanked when oil prices went from $104 to $26.  Since then, however, the price for WTI crude has crested above $50, a gain of almost 100% from the bottom.  As this starts to work its way through our economy, official inflation numbers will move up rather dramatically over time.  Some ways to hedge against higher inflation are buying TIPS, looking at short-term high yield bonds and floating-rate bonds, buying commodities and/or precious metals, or adding to stock positions (a contrast to fixed-rate investments).  Each of these carries its own risk/reward profile and may or may not be appropriate for client portfolios.

The large gains in EM stocks year to-date, particularly China’s stock market 11% gain in the last six months, surprised many observers.  A truly diversified allocation would have participated in some of that gain, but not have had the risk associated with owning just EM stocks. While we cannot predict the future, we do spend time discussing big changes that may likely occur.  We are not a buy-and-hold advisor.  We recognize that domestic and global changes will happen and that some changes to portfolios will be needed.  Our goal is to sort through the noise and make prudent decisions and changes when appropriate. There is risk in everything.  Be sure your portfolio’s allocation matches your goals, your cash flow needs, and gives you some measure of assurance.  And remember that Today’s headlines and tomorrow’s reality are seldom the same.

Asset Index Category Category Category Category 10-Year
3 Months 2016 YTD 2015 Average
Dow Jones Industrials – Large Cos -1.5% 4.0% -2.2% 4.2%
S&P 500 Index – Large Companies -2.1% 4.1% -0.7% 4.4%
S&P 400 Index – Mid-Size Companies -3.2% 7.9% -3.7% 6.7%
Russell 2000 Index – Small Companies -2.3% 4.9% -5.7% 4.5%
MSCI EAFE Index – Developed Intl. -1.3% -2.9% -3.3% 1.0%
MSCI EM Index – Emerging Markets 3.6% 14.0% -14.9% 1.9%
Short-Term Corporate Bonds 0.2% 2.5% 0.2% 2.7%
Multi-Sector Bonds -1.5% 2.8% -2.1% 4.0%
International Government Bonds -4.8% 8.8% -3.9% 3.4%
Bloomberg Commodity Index 0.8% 8.3% -24.6% -5.8%
Dow Jones U.S. Real Estate -9.4% 5.5% 2.1% 4.0%


Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment, strategy, or product or any non-investment related content, made reference to directly or indirectly in this newsletter, will be suitable for your individual situation, or prove successful. This material is distributed by PDS Planning, Inc. and is for information purposes only.  Although information has been obtained from and is based upon sources PDS Planning believes to be reliable, we do not guarantee its accuracy.  It is provided with the understanding that no fiduciary relationship exists because of this report.  Opinions expressed in this report are not necessarily the opinions of PDS Planning and are subject to change without notice.  PDS Planning assumes no liability for the interpretation or use of this report. Consultation with a qualified investment advisor is recommended prior to executing any investment strategy. No portion of this publication should be construed as legal or accounting advice.  If you are a client of PDS Planning, please remember to contact PDS Planning, Inc., in writing, if there are any changes in your personal/financial situation or investment objectives.  All rights reserved.