Quarterly Client Letter – Q3 2017

Dear O’Brien Wealth Partners Investor,

The third quarter was a stormy one everywhere but the financial markets.  Hurricanes Harvey, Irma, Jose and Maria dominated the news, flooded much of Houston and southwestern Florida and devastated the Caribbean. Storms were also brewing on either side of the Pacific as two world leaders exchanged fiery rhetoric and thinly veiled threats of nuclear destruction.  Japanese citizens held their collective breaths after receiving text messages from the government warning of a missile overhead.  It would turn out to be a test missile from North Korea, providing some comfort to the shaken islands.

While these events are critically important to humankind and those individually impacted, the markets seemingly shrugged them off and continued to move higher. Consumers continued to spend money and businesses continued to sell their products and services.  Equities again had an impressive quarter supported by strong earnings and a synchronization of growth globally.  Despite the storms flooding the headlines, stock market volatility (as measured by the VIX) continued its historically low run and ended the quarter in single digits.

In the United States, we saw a season of positive and improving earnings supporting a 4.48% average return on large companies as measured by the S&P 500 over the quarter. Looking forward, all eyes are on Washington to produce tax reform, which would provide a boost to businesses and potentially lengthen the current bull market.  The Federal Reserve continues to be accommodative by not raising rates; however, late in September the Fed officially announced its plan to reduce the size of its balance sheet.  This is a particularly important development for the markets as it signals the beginning of the end of quantitative easing, a policy which has supported the U.S. economy since November 2008. Beginning in October, the Fed will stop fully reinvesting the principal payments of maturing securities into new bonds. Instead it will allow $10B in holdings to roll off without reinvestment each month.  Gradually the amount rolled off will increase until it reaches $50B per month.  As the Fed’s balance sheet contains mostly treasuries and agency mortgages, we will be watching both of those instruments closely to see how the market responds to the decreased demand.

Overseas, international companies continued to outperform their U.S. counterparts as demonstrated by the 6.16% return for the MSCI ACWI ex U.S. Index (an index consisting of the largest companies outside the U.S.).  In late 2016 the concerns for global markets were the rising populist sentiments around the world, brought to the forefront by both Brexit and Trump’s election.  The biggest of these concerns coming into 2017 were elections in France and Germany as these could have lasting effects on the future of the European Union. The votes are now in on those two events.  Emmanuel Macron defeated Marine Le Pen in the French election in May and a few weeks ago Angela Merkel retained her German Chancellorship.  Making headlines though was the eroding of centrist parties in Germany.  The Christian Democrats in Germany (Merkel’s party) and their Bavarian sister party saw their worst result since 1949, losing 1/5 of the support they had 4 years ago.  Filling the gap is the rise of more fringe anti-immigration parties including the newer “Alternative for Germany” party – a group which saw a surge in support (winning 13% of votes).  While the course is steady in Europe with Merkel and Macron at the wheel, the populist tide is still in the wings and the situation bears on-going watch.

Emerging markets were the best performing asset class over the quarter returning 7.89% and bringing their YTD performance to 27.78%. With valuations getting full in developed markets, investors added their incremental dollar in the emerging markets, which are trading at valuations below their historical averages.  China was the top performer among the emerging countries with the MSCI China Index returning 14.66% during the quarter.

What does this mean for your portfolio?

Our international positioning for our clients boosted returns, particularly within our emerging market positions which saw impressive gains. Our investors continue to be fully allocated to equities within their investment guidelines and have benefitted from these gains. At the same time, we have structured the fixed income side of your portfolio to provide protection in the case of a down market.

For our reinsurance clients, the hurricanes mentioned at the beginning of this letter brought with them negative returns.  While Harvey posed limited insured losses due to most flood insurance being managed by the federal government, Irma caused significant insured damages in Florida’s southern and western coasts. The returns will likely change before year end as damages are totaled and premiums continue to accrue.

If you have any questions or would like to discuss the specifics of your portfolio, please contact your O’Brien Advisor.

Your O’Brien Wealth Partners LLC Investment Team