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The Market and the Economy

Indexes and Benchmarks

The following table reflects the performance of a selection of frequently used indices and benchmarks for the 2017 calendar year:

Index %Gain/Loss 2017
S & P 500 21.5
Dow Jones Industrials 25.1
Nasdaq (high-tech stocks) 28.2
Russell 2000 (small cap stocks) 13.1
Russell 3000 (broad market) 18.9
Dow Jones Global Stock Index 21.9
Dow Jones Global Stock Market (Ex-US) 24.9
Dow Jones Islamic Market Index 26.8
MSCI Emerging Market Equities 37.3
Barclay's US Aggregate Bond Index
Barclay's Global Aggregate Bond Index 7.3
US Treasury Inflation Protected Securities 1.8
WCII World Balanced Investments Index* 16.0
Bloomberg Commodity Index 1.4
DJ US Select REIT (Real Estate) 5.1
Alerian MLP Index # 7.6
Eurekahedge Hedge (Fund of Funds) Index 8.4
US Money Market Funds (taxable) 0.1
* Portfolio benchmark reflecting a 60% holding of the Dow Jones Global Stock Index and a 40% position in the Barclay World Aggregate Bond Index. # Master Limited Partnerships (oil/gas pipeline firms).

Equities worldwide performed spectacularly in 2017 with emerging markets leading the way. Only the energy and commodity sectors significantly underperformed. Bonds also performed well during the period. As has been the case for many quarters, so-called hedge funds rendered very sub-par returns.

However, in the US equity market, performance varied significantly by sector with technology issues (S & P 500 Index) gaining 34.3% and the energy sector losing 1.1% in value during the year, while the telecommunications industry rendered a dismal -6.6% for the reporting period. Large cap equities also significantly out-performed small cap issues by a large margin with the Dow Jones Industrials up 25.1% while the Russell 2000 stocks gained a more modest 13.1%. This indicates that while broadly diversified portfolios generally performed well, portfolios that were concentrated in lower performing sectors or in small cap equities performed considerably less well for 2017.

The Markets and the Economy

Although the equity markets are well overdue for a significant correction (and a 'black swan' event i.e., a catastrophic occurrence that results in a severe market contraction) is by no means out of the question, factors are in place, including low interest rates, global economic growth, lower US corporate taxation and a more business friendly regulatory environment that militate for sustainable growth in equity values for 2018. Two keys to maintaining this positive framework are 1) the Federal Reserve Bank's ability to reduce its balance sheet (sell off its large portfolio of investments) while raising short term interest rates without inducing an economic contraction and 2) continuing robust corporate profitability growth. An ideal economic outcome would reflect moderate wage and general inflation, a continued positive yield curve and US economic growth reaching 3% for 2018.

Nevertheless, experts cite indicators that should lead investors to be cautious. These include: a flattening yield curve between the 2-year and 10-year treasury bond yields i.e., as when the 2-year bond's yield equals or surpasses the 10-year bond yield; the Index of leading Indicators falling below zero, a negative correlation between the performance of technology stocks and 10-year treasury bond yields, a widening spread between junk bond and treasury bond yields, rapidly rising commodity prices and a fall in CEO's and small business confidence levels. Also, in our current environment, were the 10-year treasury bond yield to surpass 3%.

Wealth Conservancy will, of course, be monitoring these and other indicators closely in the coming months.

However, realistically, we believe that equity market returns will continue to be positive in 2018 but that returns will revert to the performance of the historical norm, that is, of between 8% and 10%, while intermediate term bonds will return 2-4%. This outcome would result in a 60/40 portfolio returning between 5.6% and 7.6%. Given these rather 'bleak' numbers in the face of recent portfolio returns, there is, therefore, a significant risk for investors to be disappointed by even superior long-term market performance.

Clearly, this year's equity's performance was by no means the norm -- nor can it be sustained -- and investors should understand this clearly. Nevertheless, if the Administration can make progress to promote job growth, achieve a rationalization of the US immigration policy and initiate a plan for significant investment in our badly neglected infrastructure, significant economic growth is possible and, with that, possibly, the diminishing of our overweening long-term Government and household debt. If the economy is robust and wages increase concomitantly, the recent tax cut for corporations may not result in an increase in the national debt, as corporate taxation comprises only about 10-13% of total Government revenues while individual income taxes and Social Security taxes together comprise greater than 80% of US Government revenues and these revenues will rise with economic prosperity.

This having been said, Wealth Conservancy will continue to evaluate all portfolios to ensure that risk levels are appropriate to each client's individual risk profile, as we may be about to enter a period when even a relatively innocuous negative event or set of circumstances may result in a serious disruption of the markets.

Updated on February 5, 2018.

Wealth Conservancy International, Inc., 7411 River Road, Fredericksburg, VA 22407
Tel: 540-548-3009 | Toll-free 1-800-515-1588
E-mail: wciicpb@comcast.net