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Market Commentary Q1 2017


Legacy Advisors' Asset Class Investing portfolios are strategically invested with a focus on long-term performance objectives. Portfolio allocations and investments are not adjusted in response to market news or economic events; however, we evaluate and report on market and economic conditions to provide our investors with perspective and to put portfolio performance in proper context.
Quarter one 2017 started off strongly with broad gains seen in both domestic and international stock markets and marginal gains in bonds, as the economy continued in a Goldilocks phase — slow but steady economic growth, low (but mounting) inflation and rising asset prices.
On the Ides of March the Fed took the forecasted step of raising interest rates, for the third time in just over two years. Interest rates fell slightly on that date, as the projected pace of future rate hikes was slightly lower than was already priced into the market. For the quarter, the 10-Year U.S. Treasury Bond fell by 5 bps, settling at 2.40%, still over 100 bps higher than the lows seen last summer.
The U.S. Dollar reversed course from its significant gains over the prior few calendar years to decline in value roughly 2% compared to a basket of international currencies. This decline helped the returns on International stocks, particularly several emerging markets such as Mexico, where the peso strengthened by 10% during the quarter and nearly 15% from its lows in January.
U.S. Economic Review
Domestic economic data continued to plug along at a healthy, if not exciting, pace. GDP growth for 2016 registered at 1.9%, a slight decline from the previous year of 2.6%, but showing upticks in Q3 and Q4 compared to the first half of the year.
The unemployment rate dropped marginally to 4.7% as of February, in the ballpark of where the rate has been over the last year, though the participation rate has ceased the precipitous fall of the previous few years. New job creations showed an uptick in January and February to a three-month average of 209,000 net job creations per month, above the 150,000-range needed to reduce unemployment.
Year-over-year inflation numbers have steadily risen the last 12 months, currently at 2.70% as of February. This swelling rate has given the Fed the impetus to raise rates at a faster clip.
Sources: Bureau of Economic Analysis, Bureau of Labor Statistics, Bloomberg Economic Calendar, U.S. Department of the Treasury, Morningstar Direct 2017.
Financial Markets Review
Domestic stocks advanced, with the one exception of U.S. Real Estate Investment Trusts (REITs). International stocks in the Value and Small areas as well as Emerging Markets saw significant gains. Bonds advanced marginally. (See chart above.)

In the U.S., Large Growth stocks lead the way in performance during Q1, with both Large Value and Small Core positive, but advancing less than Large Growth companies. Over the last 15 years, Large Value and Small Core have outperformed their Growth and Large counterparts.

Internationally, Small Growth stocks lead the way in performance during Q1, with both Large Value and Small Core positive, but advancing less than Small Growth companies. Over the last 15 years, Small Core has outperformed its Large counterpart, while Value marginally trailed Growth in the Large Cap space.
More aggressive models saw greater performance than more conservative models because of the higher returns in stocks compared to bonds. A diversified index mix of 65% stocks and 35% bonds would have returned 3.4% during the first quarter, based upon the data provided above.
65/35 Index Mix: 2% Cash (BofAML 3M US Treasury Note TR USD), 16% ST US Bonds (BofA ML Corp & Govt 1-3 Yr TR), 17% Global Bonds (Citi WGBI 1-5Yr Hdg USD), 15% US Large (S&P 500 Index), 12% US Value (Russell 1000 Value Index), 8% US Small (Russell 2000 Index), 4% US REITs (Dow Jones U.S. Select REIT Index), 14% Intl Large Value (MSCI World Ex USA Value Index (net div.)), 7% Intl Small (MSCI World Ex USA Small (net div.)), 5% Emerging Markets Value (MSCI Emerging Markets Value Index (net div)).
Indexes are unmanaged baskets of securities that are not available for direct investment by investors. Index performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Foreign securities involve additional risks, including foreign currency changes, political risks, foreign taxes, and different methods of accounting and financial reporting. Emerging markets involve additional risks, including, but not limited to, currency fluctuation, political instability, foreign taxes, and different methods of accounting and financial reporting. All investments involve risk, including the loss of principal and cannot be guaranteed against loss by a bank, custodian, or any other financial institution. The risks associated with investing in stocks and overweighting small company and value stocks potentially include increased volatility (up and down movement in the value of your assets) and loss of principal.