April 2017 Quarterly Letter

Dear Clients and Friends:

The post-election stock market rally extended into the first quarter of 2017.  U.S. equity markets reached new highs during the quarter and stocks in all developed market countries, and most emerging market countries, delivered positive returns. In fact, Russia, Hungary and Greece were the only emerging market countries to suffer negative returns during the quarter.  Despite prospects for higher short-term interest rates, the U.S. bond market also enjoyed solid gains in the first quarter.  At the same time, global bonds experienced slight declines.

The following are first quarter 2017 broad index returns:

U.S. Stock Market (Russell 3000 Index) 5.74%
International Developed Stocks (MSCI World ex USA Index) 6.81%
Emerging Market Stocks (MSCI Emerging Markets Index) 11.44%
U.S. Bond Market (Bloomberg Barclays U.S. Aggregate Bond Index) 0.82%
Global Bond Market ex U.S. (Citi WGBI ex USA Hedged to USD -0.35%

Most financial news outlets are attributing the post-election stock market rally to optimism triggered by the prospect for lower corporate tax rates and fewer regulations.  But there is another important story that isn’t getting as much press.  Earnings prospects for U.S. corporations are surging, even without considering the potential benefits derived from lower tax rates.

The 2016 per share operating income for the S&P 500 was $108.82 and analysts are projecting operating income of $130.78 for 2017 and $147.27 for 2018.  These numbers represent earnings increases of 20.18% in 2017 over 2016 and 15.88% in 2018 over 2017.  Over the long-run the stock market tends to increase in value as corporate earnings increase.  Over the short-run the stock market can be unpredictable but if we are looking for a reason the S&P 500 index has returned almost 9%, excluding dividends, since September 30, 2016, earnings projections seem to be a major factor.

While there is considerable optimism about the prospects for the U.S. economy and stock market, it is important to remind ourselves that projections are not always accurate.  If actual earnings are lower than projected, the stock market would likely decline in value.  Also, unexpected events can happen at any time causing market declines.

Many investors make the mistake of over-allocating to stocks when they are feeling optimistic.  These investors often sell at a loss when the market declines because their portfolio drops in value beyond their ability to cope.  Unless investors choose ultra-safe investments such as CD’s, short-term Treasury instruments, and money market accounts, there is always the potential for loss in a portfolio.  And even with ultra-safe portfolios there is risk they will not keep up with inflation.

We urge all of our clients to stick with your current allocations and resist the impulse to commit a larger percentage to stocks.  Sticking with a long-term allocation during good times and bad has proven to be a successful strategy and we see no reason to change strategies now.

We hope that all of our clients and friends have fared well during the first quarter and we wish everyone continued success as we move forward.  If you have any questions or if there is anything you would like to discuss, please call.

Very truly yours,

Berkson Asset Management, Inc.
Registered Investment Advisor
Steven M. Berkson, CPA\PFS, CFP®, MBT

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