Review and Outlook: Q1 2017
The 2017 1st Quarter rewarded investors in balanced portfolios with respectable returns. According to Lipper, the average balanced mutual fund returned 4.17% during the quarter. U.S. stocks, as measured by the S&P 500, returned approximately 6% for its six consecutive quarter of positive returns. For fixed income investors, the Bloomberg Barclays Intermediate Gov’t/Credit index produced a total return just shy of 1%. While GDP growth in Q1 2017 will most likely be lower than 2016 Q4, overall, we do expect GDP growth in 2017 to outpace the estimated 1.6% GDP growth in 2016.
Our team of investment professionals and analysts continue to forecast higher interest rates and inflation as we move through 2107. In the economic section, George Mokrzan, Director of Economics, forecasts stronger economic growth supported by an improvement in business spending and exports. George notes that the Federal Reserve is forecast to raise the Fed Funds rate target 3 times in 2017, upwardly revised from 2 times in the previous quarter. However, the risks for the Fed Funds rate target and overall market interest rates are to the upside. The net stimulatory impact of potential fiscal policy change by the new administration and Congress will drive those risks.
Sometime this year, the Federal Reserve may move to gradually reduce the size of its $4.5 trillion balance sheet, which has ballooned from less than $1 trillion before the Great Recession. Kirk Mentzer, Director of Fixed Income, notes in the fixed income section that when the Fed says they wish to shrink their balance sheet, they are simply taking away another source of market demand which should reduce downward pressure on yields. Therefore, we expect the 10-year Treasury yield to gravitate towards 3% by year-end.
Again, Kirk provides sound and prudent strategic advice to our portfolio managers and clients with regard to managing and positioning fixed income portfolios in a rising interest rate environment.