GSR Capital Management 3Q 2017 Newsletter

Market Update

With the bull market in stocks raging on and volatility noticeably absent, investors are likely to be questioning why they are holding bonds in their portfolios. After all, when stocks are marching higher, bonds are a drag on performance.  It is important to remember that it is not a question of if volatility will return, but when. The merits of owning bonds will again be recognized.

In the meantime, stocks are partying like its 1999 (but without the nosebleed valuations that we had back then).  Foreign stocks are again leading the way. Through the first half of the year, the MSCI Emerging Market index is up 18.4%, the MSCI EAFE index of established foreign stocks is up 13.8%, and the S&P 500 index of large cap domestic stocks is up 9.3% (all in US dollar terms).  Foreign market returns were again enhanced by a weakening U.S. Dollar.  Bonds as measured by the Bloomberg Barclays U.S. Intermediate Government/Credit index were up 1.7%.

Among the noteworthy events in the second quarter was the Federal Reserve raising the Federal Funds rate for the third time in six months.  The Fed has a bit of a reputation for causing bubbles, and causing recessions.  I recently saw a chart that showed that every recession over the past sixty years was preceded by an interest rate tightening cycle (raising rates) by the Fed. This is probably not what you want to hear right now. Thankfully, interest rate increases by the Fed have not always been closely followed by recessions. The best indicator in my book for predicting recessions is the yield curve, in which the difference between long-term and short-term interest rates is measured.  A flat or inverted yield curve (meaning long term interest rates are the same as or lower than short term rates) has been a reliable indicator that a recession is on the horizon.  The curve does have some slope to it right now, so I think we are in good shape. I believe the Fed is now in "wait and see" mode.  Comments this week from Fed Chair Janet Yellen were encouraging, which stocks responded to nicely. While you don't have to have a recession for bad stuff to happen in the financial markets, they seem to be the biggest culprit for the especially volatile markets.

Reinforcing my conviction that investors are well served to not put too much weight on the expectations of financial market forecasters, I saw an enlightening first half summary in the Wall Street Journal. Some of the more notable "misses" included:

  1. The yield on 10 year Treasuries going down instead of up.
  2. The U.S. Dollar going down instead of up.
  3. Market volatility being incredibly benign instead of rising.
  4. Oil prices going down instead of stabilizing.

On the latter note, the energy sector has been the worst performing sector and a drag on returns thus far in 2017.  In 2016, it was the best performing sector.

In the meantime, our Goldilocks economy trudges on.  Growth has not been so strong that it necessitates a strong policy response from the Fed, nor so weak that it is expected to stall.  The U.S. consumer is in good shape with jobs plentiful and debt service costs low.  Wage growth is positive yet contained, helping to keep a lid on inflation.  The manufacturing and service sectors of the global economy are doing well, especially in Europe (for more on Europe, refer to my Europe Rising blog on the news tab of our website).  Regardless of how rosy or dire an outlook may be, financial markets can have a mind of their own at times, which is yet another reason for investors to be diligent in maintaining their long-term strategy and asset allocation.

I hope you are having a great summer.  If you have any questions or anything I might be able to help you with, do not hesitate to contact me.


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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