Market Commentary

Dark Side of the Moon

July 2017

"All that is now   |   All that is gone   |   All that's to come
and everything under the sun is in tune
but the sun is eclipsed by the moon"
- Pink Floyd, “Eclipse”

On August 21st, we will experience the first total solar eclipse in nearly 100 years to cross the continental United States. We have witnessed other eclipses over the last century, but this is the first since 1918¹ that will go coast to coast. An eerie twilight will cut a path starting in Oregon, then Idaho, Wyoming, Nebraska, Missouri, Kentucky, Tennessee and South Carolina.

Typically, the sun rises in the morning and the moon waits until night to reflect the sun’s light, but even that predictable cycle is disrupted occasionally. Humans rely on the predictability of this relationship between sun and moon, and when it is disrupted or obscured, they gather to watch with anxiety and rapt attention. The upcoming eclipse could potentially cause some of the worst traffic gridlock in the nation’s history according to one forecast:² 12 million people live within the path of the eclipse, and another 200 million people live within a day’s drive.

Haven't you heard it's a battle of words³

Since the Trump presidency began, we have watched the words out of Washington, DC with anxiety and rapt attention as well. There the gridlock is of a different sort. Both the House and Senate will (likely) be in recess for the month of August⁴, but political infighting has prevented Republican lawmakers from moving forward with any sort of legislative agenda. Broadly, the US stock market had anticipated -- and priced in -- a simplified corporate tax structure, a reduced regulatory environment, and increased infrastructure spending.

Half way through the year, none of those policy catalysts seem any closer than they did following the election. The disruption of 'normal' Washington relationships has continued to cause unease, and captured attention and headlines. Expectations for domestic economic growth became unrealistically elevated following the election; indeed – there has been no pickup in economic growth yet in 2017. The domestic equity market, though, has continued to rise,⁵ and in response we continue to maintain a cautious allocation.

In January, we cautioned that the headwinds to faster economic growth were structural (labor force demographics and productivity limitations) and investors would find more opportunity in exposure to non-US markets, particularly emerging markets⁶

Through the first half of the year this international focus has worked out well. The MSCI Emerging Markets index gained over 18% through the end of June compared to the 9.3% total return for the S&P 500 index. Equities in developed international countries also did well. The MSCI EAFE Index, which measures the performance of large companies in 21 developed economies outside of the U.S. and Canada, gained 13.4% through the first half. Meanwhile, domestic small company stocks lagged significantly – as measured by the S&P Small Cap 600 index – gaining only 2.8% through the first half aided by a 3.0% bounce in June.

The Federal Reserve has raised short term interest rates twice this year, but even so we have seen modest gains in fixed income investments, with high yield corporate bonds gaining 4.9% and the Barclays US Aggregate Bond index – a broader measure of investment grade bond performance – gained 2.27%. Commodities were broadly lower with gains in gold and other precious metals offset by falling energy prices.

Looking at the second half of the year we think there is still opportunity abroad for continued price appreciation. Global economic conditions have been improving and valuations remain relatively more compelling than in the US.

Us and them⁷

In June, President Trump announced that the United States would withdraw from the Paris climate accord. This disrupted recent momentum towards proactive environmental policy globally, but like the eclipse, the disruption was short lived. At the recent G-20 summit in Hamburg, it wasn’t just global political leaders that criticized the decision; corporate executives admonished the President as well, including the CEOs of ExxonMobil and ConocoPhillips. Trump may have pulled out of the accord, but the "G-19" are still moving forward, and much of US corporate management is aligned with them.

Investors who also find themselves at odds with this decision have been wondering what they can do as individuals. There are growing opportunities for incorporating low-carbon investing strategies into client portfolios. We at North Berkeley have developed new options for clients who are interested in this, and are happy to discuss it with you.

The cycles of financial markets and environmental technology rarely move in a straight line, and sometimes are distorted by policy. We remain focused on protecting and growing your investments, regardless of temporary disruption.

Lastly, for those who are going to brave the crowds to see this historic midday darkness in August, keep in mind the two minute and forty second long eclipse will be only slightly longer than Pink Floyd’s two minute and three second long song 'Eclipse.'

Enjoy your summer, and thank you for trusting us with your financial well-being.

This is a general assessment of client portfolios and does not reflect the specific circumstance of every client.

1. https://en.wikipedia.org/wiki/Solar_eclipse_of_June_8,_1918
2. https://www.space.com/37234-expect-solar-eclipse-traffic-jams.html
3. Pink Floyd (Waters/Wright). "Us and Them." Dark Side of the Moon, EMI, 1973
4. http://thehill.com/homenews/senate/341406-gop-senators-calling-for-congress-to-work-through-august-recess
5. "Economy Chugs as Market Soars," Wall Street Journal, July 15-16, 2017, page 1.
6. North Berkeley Investment Partners. "There is Always Opportunity" January 2017
7. Pink Floyd (Waters/Wright). Dark Side of the Moon, EMI, 1973