Aaron Schaefer

Jan 08 2018

The Economy and Market from Here… at Hills January 2018

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

Global stock markets continued to tack on gains as a result of positive earnings reports and economic data that has surprised to the upside.  Recent economic reports saw consumer sentiment edge higher, existing home sales rise despite expectations, and initial jobless claims retreat.  The S&P 500 continued to eclipse record levels and finished up 6.64% in the fourth quarter and 21.89% year-to-date.  Foreign markets have experienced continued gains as well.  The MSCI-EAFE, a common international benchmark, is up 4.29% quarter-to-date and 25.77% year-to-date.

Long-term interest rates held steady during the quarter.  The ten-year treasury yield ended the year at 2.40%.  Short-term rates have ticked higher following recent rate hikes.  The Federal Open Market Committee (FOMC), the body that sets short-term interest rates, decided to raise rates again at their December meeting and are likely to continue in 2018.  Inflation has been surprisingly low allowing the FOMC to take their time and raise rates at a measured pace.  Janet Yellen, the current Fed Chair, will step down at the end of her term.  Confirmation hearings began in late November for her replacement, Jerome Powell.  Markets will closely watch him in the coming months to see how he may differ from his predecessor.


Congress narrowly passed tax reform legislation that will go into effect this year.  Time will tell what impact they will have on the economy as corporate and individual tax payers digest their impact. A short-term funding bill was also passed prior to year-end but a long-term spending bill will need to be reached to prevent a government shutdown.  This, along with continued unrest in the Middle East and sabre rattling in North Korea, could set the stage for a short-term market pull back or a correction.  As we have expressed for many months, stock market corrections are a common occurrence.  The fact that there has not been a correction or a decline in the overall market of greater than 3% in over a year is extremely unusual.  Though our outlook is still positive for stocks, we are actively trimming stocks to take advantage of the record price levels and build up reserves for when a correction inevitably happens.  Make no mistake – there is a lot to be optimistic about in terms of the global economy.  The US continues its long expansion and the rest of the developed world has also returned to sustained economic growth and inflation remains contained.  With that in mind, the prudent investor is wise to take profits when markets rise to prepare for the dreary days when the market is in the doldrums.

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 asset 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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