GSR Capital Management 2Q 2017 Newsletter

Market Update

The 1st quarter of 2017 was a promising start to the new year, as stocks continued to build on the momentum we saw in 2016.  Foreign stocks in particular started the year hot, and stayed hot, netting solidly positive returns all three months.  The post-election weakness seen in emerging market stocks was short-lived, as these resumed the dominance they displayed in 2016 leading up to the election.  Through the end of the 1st quarter, the MSCI Emerging Market index was up 11.5%, the MSCI EAFE index of established foreign stocks was up 7.3%, and large cap domestic stocks as measured by the S&P 500 were up 6.1%.  Foreign stocks got a nice boost from a weakening US Dollar.

Curiously, small company domestic stocks as measured by the Russell 2000 trailed their large cap brethren, up “only” 2.5%.  Smaller companies are expected to benefit the most from a reduction in the corporate tax rate, should this come to pass.  The Barclays Capital U.S. Intermediate Government/Credit bond index was up 0.8% on a total return basis.

A question naturally on investors’ minds is whether or not the “Trump-bump” post-election stock market rally is over, especially in light of the White House and Republicans’ failure to get health care reform passed.  I question how much of this rally has really had to do with the election.  The stock market’s resilience in the face of the failed health care reform attempt and geopolitical hot spots has been noteworthy.  While the impressive breakout of the S&P 500 to new highs on March 1st has thus far proven to be a false breakout (meaning stocks did not continue to march higher, but instead dropped back down into their prior trading range), the fact that stocks have stood their ground over the past month despite flare-ups in Syria and North Korea is encouraging.  As noted in my previous quarterly update, I believe improving corporate earnings are most responsible for the rally and resilience of stocks, and less-so on who is in the White House.  The prospect of tax reform certainly provides an added reason for hope.

During the just concluded tax season, I had an inquiry from a client which may be a question others have as well.  During tax season, investors with taxable accounts tally their realized gains and losses on any positions sold over the course of the year, and generally speaking will owe tax on any realized gains.  What is interesting is that a portfolio’s realized gains or losses for the year are no indication of how the investment portfolio actually performed during the year.  You could have a year in which the portfolio had a great year but large losses were realized from a tax standpoint, or you could have a situation where the portfolio had a crummy year but large taxable gains (the worst of both worlds!).  These are the two extreme scenarios, with the point being that portfolio performance and realized gains and losses in a given year are totally unrelated.

Stock market valuations here in the U.S. remain a hot topic.  In short, by some measures they appear very high (stock market value versus gross domestic product, and on a price to sales basis), whereas by other measures they appear very low (in particular, relative to their historic valuation versus bonds).  Somebody could make a compelling argument that domestic stocks are either very expensive or very cheap.  Thankfully, as investors in this day and age we are not limited to investing in just one country or asset class, but we have the world at our fingertips.

I was reflecting the other day on how we are truly blessed with the nicest clients a person could ask for.  It is a privilege to walk side by side with you through life, whether it be the good times or the difficult times that we all encounter.  If there is ever anything we can do further to help you or someone you care about, please let us know.  We are always happy to help.


Glenn S. Rank, CIMA®
Certified Investment Management Analyst®
President, GSR Capital Management

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  • The Russell 2000 index is comprised of approximately 2,000 of the smaller securities from the Russell 3000. Representing approximately 10% of the Russell 3000, the index is created to provide a full and unbiased indicator of the small cap segment. The S&P 500 is an unmanaged index of 500 widely held stocks that’s generally considered representative of the U.S. stock market.  The MSCI EAFE index and the MSCI Emerging Markets index are unmanaged indexes compiled by Morgan Stanley Capital International that are generally considered representative of the developed international stock market and emerging international stock market, respectively.  International securities involve additional risks including currency fluctuations, differing financial accounting standards, and possible political and economic volatility, and may not be suitable for all investors.  Investing in emerging markets can be riskier than investing in well-established foreign markets. Investing in small cap stocks generally involves greater risks, and therefore, may not be appropriate for every investor. The Barclays Capital U.S. Intermediate Government/Credit Bond Index measures the performance of U.S. Dollar denominated U.S. Treasuries, government-related and investment grade U.S. corporate securities that have a remaining maturity of greater than one year and less than ten years. Inclusion of these indexes is for illustrative purposes only.  Keep in mind that individuals cannot invest directly in any index and index performance does not include transaction costs or other fees, which will affect actual investment performance.  Individual investor’s results will vary.
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