Aaron Schaefer

Oct 04 2017

The Economy and Market from Here…at Hills October 2017

The Economy and Market from Here...at Hills.

Domestic and International markets continued to gain ground despite a tumultuous quarter. Growing tensions with North Korea and two severe hurricanes that made landfall in Texas, the Caribbean, and Florida were not enough to keep markets from eclipsing record highs. The S&P 500 gained 4.48% in the third quarter and is up 14.24% year to date. The MSCI EAFE, a common international benchmark, gained 5.47% in the third quarter and is up 20.47% year to date. Much of the gains may be attributed to better than expected corporate earnings in the US and around the globe as well as continued improvement in global economic conditions.

Interest rates held steady during the quarter. The ten-year treasury yield currently sits at 2.33%. The Federal Open Market Committee, the body that sets short-term interest rates, held rates steady after two increases this year. The European Central bank also recently decided to keep rates steady. The global bond market seems to be indicating that economic growth will be subdued in the near-term and inflation should remain low. This is a different tale than the stock market is telling, and only time will prove which market is right. In the meantime, investors will eagerly await rate decisions from both governing bodies for the remainder of the year.

Volatility continues to be extremely low. One way to measure volatility is to look at how many days the S&P 500 is up or down more than 1% in a given period. When the market bottomed in 2009, the S&P was up or down more than 1% 117 out of 252 trading days, or 46% of the days. Since 2010 that number was 24% or 60 days. So far this year, it has occurred only 8 out of 176 trading days, or 5% of the time. It is unclear what is causing the lack of volatility. Historically, major geopolitical turmoil and destructive natural disasters have caused more severe market reactions. We suspect that this is a temporary market condition and normal volatility is on the horizon. It is not uncommon for corrections of 5% or more to happen two or three times a year, and historically, corrections of greater than 10% have occurred once per year on average. No one can predict when the next correction will occur and markets may continue to march higher claiming fresh all-time highs along the way. In the meantime, we are content harvesting gains when markets are up so we are well positioned when the inevitable correction does indeed occur.

Our long-term view is that stocks represent the best opportunity to build wealth. Inflation remains the key long-term risk to our customers achieving their investment goals. Tactically, we remain overweight domestic stocks and underweight international stocks. However, we increased international exposure throughout the quarter and may continue to do so while the relative value opportunity in the asset class persists.

As always, if it has been a while since you have visited with us about your financial goals, please feel free to contact your account administrator to review your account and determine if the current allocation is still appropriate for your circumstances.

Some trust products and IRA contributions/balances are not a deposit, not FDIC insured by any federal government agency, not guaranteed by the bank and may go down in value.
Aaron Schaefer

About Aaron Schaefer

Aaron Schaefer is Vice President, Trust Investment Officer at Hills Bank’s North Liberty location on Forevergreen Road. He has been at Hills Bank since 2004 and manages the investment area of the Trust and Wealth Management division. Aaron can be reached at aaron_schaefer@hillsbank.com.

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