President & CEO Dan Kraninger reflects on 2017 and provides insight moving forward

“The greatest trick the devil ever pulled was convincing the world he didn’t exist.”  

  - The Usual Suspects (1995)

My wife and I like the movies.  We go throughout the year but between Christmas and New Year’s, we really pick up steam.  With the cold weather, time off work, and family gatherings, we certainly didn’t disappoint this year. One in particular stood out and I’m glad we saw it again -- The Usual Suspects.  Interestingly, the line above hit me as soon as I heard it as the lead in to this quarter’s letter.  I’ll simply change a few words --  the greatest trick the market ever pulled was convincing the world volatility didn’t exist.

Consider volatility.  Despite the geopolitical maelstrom in 2017, the North Korean conflict, fear of China’s economic slowdown, the stock market’s advance, and instability in South America, the stock price daily volatility of the S&P 500 Index was the lowest in a half-century. You have to go back to 1964 to find the average daily change for the market as low as it was in 2017.

What has been the most notable performer in 2017 in your Tactical Income portfolio, and to what do you attribute its gains?

CLY, the iShares 10+ Year Credit Bond ETF, was certainly among the top performing positions in our Tactical Income portfolio this year. The security was up 12.1% and we currently hold about a 15% position in our portfolio. With the U.S. economy remaining fundamentally strong, the default rate of corporate bonds is relatively low. Our ETF scoring model showed an attractive aggregate for CLY throughout the year with valuations and sentiment signals being the strongest contributors. Exposure to global infrastructure from IGF (iShares Global Infrastructure ETF) was another noteworthy holding in 2017. As investors anticipated pro-growth policies and more infrastructure spending in the U.S., IGF climbed throughout 2017, finishing the year +19%.

What drove the additional allocation to U.S. equities in the growth portfolios and how do you like the asset class heading into 2018?

What happened in December?

 | U.S. equities continued their march upward amidst stellar holiday retail numbers that hit their highest levels since 2011, a welcome end to a tumultuous year of store closings and major bankruptcies in the retail sector. Although consumer confidence fell slightly, it was offset by investor sentiment which hit its most optimistic level in three years. After a period of increasing employment yet stagnant wage growth, workers have begun to see increased compensation. Additionally 18 states voted to increase minimum wage, which should aid pay growth moving forward. In a relatively telegraphed move, the Federal Reserve raised its target short-term interest rate. Janet Yellen, in what was likely her final address as the Fed Chair, commented on the global economic growth optimistically and noted that her likely successor, Jerome Powell, holds similar views on monetary policy.

Across the globe, Emerging and Asian markets finished with a positive December and as the year’s biggest winners. European stocks notched their best year since 2013 on surging tech and mining sectors.