Most equity and fixed income asset classes, including U.S. stocks, international stocks, and high-yield bonds, delivered better than expected returns during the first four months of 2017. This is reflecting investors' assessment that we are experiencing globally synchronized economic growth amplified by continued global central banking liquidity. With the bull market in equities now surpassing eight years, some are asking if record high stock prices are justified. Our view is that traditional equity and fixed income asset classes are fairly but fully valued relative to the earnings growth and economic outlook.

For the rest of 2017 and into 2018, we expect moderately positive economic growth and gradual increases in interest rates. We expect equities to generate returns in the range of 5.0%-7.0% for this yearThere are many positive forces at work throughout the U.S. economy, including solid job creation, rising wages, a strong housing market, reasonable consumer debt levels, rising corporate profits, and high confidence readings from consumers and businesses.

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Our view of the domestic economy starts with consumers, whose propensity to spend is directly related to the job market, which continues to add new workers. The unemployment rate has reached a 10-year low (and we believe is headed below 4% in 2018) as employers continue to add new workers every month. Since the end of the recession in 2009, the U.S. economy has generated more than 16 million new jobs.

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U.S. workers are continuing to find new jobs; and with wage growth remaining positive and consumer confidence rising, we expect consumer spending to grow at an annualized rate of 2.0%-2.5% for the rest of 2017 and slightly higher in 2018.

After consumers, the second most important component of the domestic economic outlook is corporations. We see growth in corporate profits reaching record levels in 2017 and 2018, supporting record valuations for blue chip stocks. Corporate earnings are set to increase by about 4%-5% this year, which supports a virtuous cycle of new hiring and increased capital spending by companies.

While equity valuations are full, this level appears appropriate given the positive outlook for earnings and consumer spending. Within the equity markets, we prefer sectors where valuations are more attractive and have reduced allocations to certain areas we view as overvalued. As such, we remain committed to U.S. growth equities, high dividend equities, high-yield non-investment grade bonds, and specialty reinsurance investments.

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Continued economic growth, a benign inflation outlook, and strong employment data indicate that the Fed is likely to raise interest rates twice more in 2017. We also anticipate additional rate increases in 2018. However, for now, gradually rising rates are not likely to have a meaningful adverse impact on the financial markets and the economy.

While there are many uncertainties arising from Washington, we are focused on the outlook for economic growth, corporate earnings, and interest rates. As we have noted previously, policy changes in Washington could provide fuel that prolongs economic growth, or an unexpected and negative trade war could arise. In either case, being nimble is required as we are watching events carefully.

We expect stocks and high-yield fixed income to move higher over the next year, while investment-grade bonds will likely encounter some price pressure due to rising rates. As always, we are being disciplined in deploying new cash.

 

All returns cited are in USD. Index returns include the reinvestment of dividends.

Index Definitions

The Standard & Poor's (S&P) 500 Index represents 500 large U.S. companies. The comparative market index is not directly investable and is not adjusted to reflect expenses that the SEC requires to be reflected in the fund's performance.

The University of Michigan Consumer Sentiment Index is a consumer confidence index published monthly by the University of Michigan. The index is normalized to have a value of 100 in December 1964.

Indices are unmanaged, and one cannot invest directly in an index. Index returns do not reflect a deduction for fees or expenses.

Important Disclosures

The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice.

Certain statements contained herein may constitute projections, forecasts, and other forward-looking statements, which do not reflect actual results and are based primarily upon a hypothetical set of assumptions applied to certain historical financial information. Certain information has been provided by third-party sources and, although believed to be reliable, it has not been independently verified and its accuracy or completeness cannot be guaranteed.

Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as of the date of this document and are subject to change.

There are inherent risks with equity investing. These risks include, but are not limited to, stock market, manager, or investment style. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices.

Investing in international markets carries risks such as currency fluctuation, regulatory risks, and economic and political instability. Emerging markets involve heightened risks related to the same factors as well as increased volatility, lower trading volume, and less liquidity. Emerging markets can have greater custodial and operational risks, and less developed legal and accounting systems than developed markets.

There are inherent risks with fixed income investing. These risks may include interest rate, call, credit, market, inflation, government policy, liquidity, or junk bond. When interest rates rise, bond prices fall. This risk is heightened with investments in longer duration fixed-income securities and during periods when prevailing interest rates are low or negative.

Investments in below-investment-grade debt securities, which are usually called “high yield" or “junk bonds," are typically in weaker financial health and such securities can be harder to value and sell and their prices can be more volatile than more highly rated securities. While these securities generally have higher rates of interest, they also involve greater risk of default than do securities of a higher-quality rating.

All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future performance.

This material is available to advisory and sub-advised clients of City National Rochdale, LLC, a Registered Investment Advisor and a wholly owned subsidiary of City National Bank.