Dear Clients and Friends of Insight,
We began 2017 with our positive outlook for the performance of client portfolios. We felt that stock prices would continue advancing, despite their high valuations at the start of the year, due to the improving global economy and the likelihood of double-digit earnings growth. Further, we believed that our high-quality intermediate-term bond strategy would contribute positive results, even though the Federal Reserve was poised to raise short-term interest rates throughout the year.
Our clients were rewarded by this outlook with strong portfolio returns that materially exceeded long-term averages. These returns were powered by a stock market that repeatedly and steadily set new highs. Though everyone seemed to agree that there was much to worry about through the year (North Korea, impulsive tweets, and natural disasters to name a few), for stock investors, the market was not among them. Short-term corrections were non-existent as demonstrated by the S&P 500 experiencing only four trading days with declines of 1% or more! In fact, the Dow Jones Industrial Average set 71 new highs on its way to posting a positive return in all 12 months, feats never before achieved in its long history.
Alas, even the bond market surprised the experts by delivering a positive result. Bond allocations in our client portfolios generally gained 4% or so. This is a very decent result given our low inflation rate and the upward pressure on interest rates. Recall that the Federal Reserve raised their short-term interest rate three times in 2017.
Our outlook for 2018 is very similar to last year’s and for many of the same reasons.
Stocks can continue to advance despite their lofty valuations. Global economic conditions continue to improve, and GDP growth estimates are rising both in the U.S. and abroad. Some say the current global economic expansion is only about half over. Sales growth is likely to continue, with current estimates of 5% growth in 2018 compared to 6% growth in 2017. Corporate earnings growth could exceed sales growth due to a continuing expansion in profit margins. Corporate investment is increasing, and mergers and acquisitions have begun to accelerate. Government policies regarding taxation and regulation have become much more favorable for corporations.
Business and consumer sentiment remains at very high levels.
Within this generally positive backdrop for stocks, we believe there will be uneven benefits. Some companies, such as those in industrial, financial and consumer discretionary sectors, will be more positively impacted by faster economic growth. While other companies, such as consumer staples and health care, may not benefit as much. And of course, stock valuations will be an important determinant of overall results. Though earnings have advanced nicely for most companies, the prices for many increased even more, resulting in some very elevated price-to-earnings ratios.
Bonds will be hindered by an environment of rising interest rates and tighter monetary conditions, continuing the environment of modest interest-rate risk. This risk is manageable as there is still considerable monetary accommodation around the world, as evidenced by over $10 trillion in global government bonds that are still trading with negative yields. Thus, we believe it is unlikely that U.S. interest rates will rise dramatically. In addition to this general interest-rate risk, investors must be mindful of the greater risks from lower-quality bonds, certain sector exposures, and longer-term maturities. Again, we believe that, with the careful selection of high-quality, intermediate-term bonds, investors can achieve modest returns and reliable income.
All of us at Insight sincerely thank all of you for your confidence and support throughout 2017, another successful year for us. Our assets under management grew by 30% thanks to some meaningful referrals, and several clients entrusting us with additional assets to manage.
Our commitment to deliver outstanding service for our clients is stronger than ever as we continue to:
- Manage individualized portfolios that can deliver strong after-tax investment returns
- Communicate effectively and clearly on a broad range of investment and wealth management strategies
- Serve our clients’ administrative needs promptly and efficiently
- Uphold our fiduciary duty to act in our clients’ best interest We wish you a healthy and prosperous 2018!
INSIGHT INVESTMENT COUNSEL