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Quarterly Market Review: Q2 2017

July 18, 2017

 

Inheritance Expectations: The 30% Generational Gap 

 

While I’m not a full subscriber to generalizations about generations, it can be interesting and insightful to see where there are similarities or differences in outlooks and expectations, particularly when it comes to money. One topic that is especially interesting is inheritance. I understand the natural curiosity and desire for privacy. When I was a kid, I asked my dad how much money he made. Not that I had any concept of money, but I was just curious. I received the simple answer: “enough”. While the vague answer was completely appropriate, the general lack of financial discussion between the generations can have meaningful consequences. We all get it. It can be uncomfortable to talk to your parents/children about money, but financial topics become increasingly appropriate and important as we age.

 

With respect to inheritance, an interesting gap has emerged between the generations. New research published by Natixis (June 2017) shows that almost 70 percent of young people (Millennials) expect to receive an inheritance; however, only 40 percent of their parents plan to leave one! Clearly there is a gap in expectations (30%!), likely due to a lack of communication.

 

The research also shows that those under age 35 may need to question their assumptions about retirement and how to fund it. Millennials say they plan to quit working at age 59, which is six years earlier than Baby Boomers, who, on average, expect to retire at age 65. While this could be a classic example of wishful thinking, it is possible that Millennials are either counting on an inheritance windfall or may expect a reduced standard of living in retirement. Perhaps more confounding is the apparent contradiction shown in the data below. While 41% of Millennials say they do not expect government benefits like Social Security to be available to them in retirement, they also have the lowest percentage of respondents saying that funding their own retirement is their responsibility.

 

Matters may be even more precarious for some of those Millennials and Gen Xers, as 24 percent of Boomers expect that "contributions from children" will play an important role in funding their retirement. It’s highly unlikely that such an expense has been taken into account by the kids!

 

Are these failures of communication or of planning? Likely, it’s both. Conversations about money (and/or death) and its ramifications are usually not something people want to have, despite its importance. It can also be difficult to have realistic expectation about retirement when that may be 40 years in the future, and is probably not top-of-mind for those early in their careers.

 

Our advice? Start having these conversations when the time is right for you and your family. And hopefully, start having them before you think you need to. At a minimum, we want to be sure we are having these conversations with you. It is important that expectations are realistic, so that we are planning for retirement in practical ways to achieve desired outcomes.

 

And, stay tuned! Our next article will provide retirement savings and planning advice by age/decade, and will include some general guidelines to help demystify what to aim for in terms of the growth and progression of your savings over time.

 

Economic Indicators at a Glance

 

Below you’ll find a snapshot of some top-line economic indicators, followed by the Quarterly Market Review. 

 Data source: Trading Economics. 2017.

Market Summary
Second Quarter 2017 Index Returns

 

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: US Stock Market (Russell 3000 Index), International Developed Stocks (MSCI World ex USA Index [net div.]), Emerging Markets (MSCI Emerging Markets Index [net div.]), Global Real Estate (S&P Global REIT Index), US Bond Market (Barclays US Aggregate Bond Index), and Global Bond ex US Market (Citigroup WGBI ex USA 1−30 Years [Hedged to USD]). The S&P data are provided by Standard & Poor's Index Services Group. Russell data © Russell Investment Group 1995–2017, all rights reserved. MSCI data © MSCI 2017, all rights reserved. Barclays data provided by Barclays Bank PLC. Citigroup bond indices © 2017 by Citigroup.

World Stock Market Performance

MSCI All Country World Index with selected headlines from Q2 2017

These headlines are not offered to explain market returns. Instead, they serve as a reminder that investors should view daily events from a long-term perspective and avoid making investment decisions based solely on the news.

 

Graph Source: MSCI ACWI Index. MSCI data © MSCI 2017, all rights reserved.
It is not possible to invest directly in an index. Performance does not reflect the expenses associated with management of an actual portfolio. Past performance is not a guarantee of future results.

World Asset Classes

Second Quarter 2017 Index Returns (%)

 

Looking at broad market indices, non-U.S. developed markets and emerging markets recorded similar returns, outperforming the U.S. during the quarter.

 

The value effect was negative in the U.S., non-U.S., and emerging markets. Small caps outperformed large caps in non-US developed markets but underperformed in the U.S. and emerging markets.   

 

 

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. The S&P data is provided by Standard & Poor's Index Services Group. Russell data © Russell Investment Group 1995–2017, all rights reserved. MSCI data © MSCI 2016, all rights reserved. Dow Jones data (formerly Dow Jones Wilshire) provided by Dow Jones Indexes. Barclays data provided by Barclays Bank PLC.

 

U.S. Stocks 

Second Quarter 2017 Index Returns

 

The broad US equity market posted positive returns for the quarter but underperformed both non-US developed and emerging markets. Value underperformed growth indices in the US across all size ranges. Small caps in the US underperformed large caps.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: Marketwide (Russell 3000 Index), Large Cap (Russell 1000 Index), Large Cap Value (Russell 1000 Value Index), Large Cap Growth (Russell 1000 Growth Index), Small Cap (Russell 2000 Index), Small Cap Value (Russell 2000 Value Index), and Small Cap Growth (Russell 2000 Growth Index). World Market Cap represented by Russell 3000 Index, MSCI World ex USA IMI Index, and MSCI Emerging Markets IMI Index. Russell 3000 Index is used as the proxy for the US market. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. MSCI data © MSCI 2017, all rights reserved.

 

Real Estate Investment Trusts (REITs)

Second Quarter 2017 Index Returns

 

Non-U.S. real estate investment trusts outperformed U.S. REITs.

 

 

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Number of REIT stocks and total value based on the two indices. All index returns are net of withholding tax on dividends. Total value of REIT stocks represented by Dow Jones US Select REIT Index and the S&P Global ex US REIT Index. Dow Jones US Select REIT Index used as proxy for the US market, and S&P Global ex US REIT Index used as proxy for the World ex US market. Dow Jones US Select REIT Index data provided by Dow Jones ©. S&P Global ex US REIT Index data provided by Standard and Poor's Index Services Group © 2017.

Select Country Performance

Second Quarter 2017 Index Returns

 

In U.S. dollar terms, Austria and Denmark recorded the highest country performance in developed markets, while Australia and Canada posted the lowest returns for the quarter. In emerging markets, Greece, Hungary, and Turkey posted the highest country returns, while Qatar and Russia had the lowest performance.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Country performance based on respective indices in the MSCI World ex US IMI Index (for developed markets), Russell 3000 Index (for US), and MSCI Emerging Markets IMI Index. All returns in USD and net of withholding tax on dividends. MSCI data © MSCI 2017, all rights reserved. Russell data © Russell Investment Group 1995–2017, all rights reserved. UAE and Qatar have been reclassified as emerging markets by MSCI, effective May 2014.

Fixed Income

Second Quarter 2017 Index Returns

 

Interest rates were mixed across the U.S. fixed income market during the second quarter. The yield on the 5-year Treasury note decreased 4 basis points (bps) to 1.89%. The yield on the 10-year Treasury note decreased 9 bps to 2.31%. The 30-year Treasury bond yield decreased 18 bps to finish at 2.84%.

 

The yield on the 1-year Treasury bill rose 21 bps to 1.24%, and the 2-year Treasury note yield rose 11 bps to 1.38%. The yield on the 3-month Treasury bill climbed 27 bps to 1.03%, while the 6-month Treasury bill yield increased 23 bps to 1.14%.

 

In terms of total returns, short-term corporate bonds gained 0.59% and intermediate corporates gained 1.49%.

 

Short-term municipal bonds gained 0.56%, while intermediate muni bonds returned 1.97%. Revenue bonds gained 2.19%, outperforming general obligation bonds by 39 bps.

 

 

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. a. Bloomberg Barclays US Corporate Bond Index. b. Bloomberg Barclays Municipal Bond Index. Yield curve data from Federal Reserve. State and local bonds are from the Bond Buyer Index, general obligation, 20 years to maturity, mixed quality. AAA-AA Corporates represent the Bank of America Merrill Lynch US Corporates, AA-AAA rated. A-BBB Corporates represent the Bank of America Merrill Lynch US Corporates, BBB-A rated. Bloomberg Barclays data provided by Bloomberg. US long-term bonds, bills, inflation, and fixed income factor data © Stocks, Bonds, Bills, and Inflation (SBBI) Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield). Citigroup bond indices © 2017 by Citigroup. The BofA Merrill Lynch Indices are used with permission; © 2017 Merrill Lynch, Pierce, Fenner & Smith Incorporated; all rights reserved. Merrill Lynch, Pierce, Fenner & Smith Incorporated is a wholly owned subsidiary of Bank of America Corporation.

 

This report was prepared by Gregory Saliba.

 

Gregory Saliba

President, Taurus Capital Management

saliba@tauruscap.com

(503) 756-2972

 

 

 

 

20+ years in Corporate Finance, Debt Capital Markets and Investment Management

2010 Oregon Ethics in Business Award Recipient

Public Speaker on Risk, Behavioral Finance and Ethics

Finance Faculty Member (12 years)

  • Willamette University, Atkinson Graduate School of Management

  • Portland State University, School of Business Administration

Extensive Community Involvement

 

 

 

 

 

 

 

 

 

 

 

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