
ACI 2nd Half 2017 Market Outlook & 1st Half Results — July 25, 2017
It’s been an interesting and largely rewarding year in the markets so far as many ACI expectations have come to pass. While ACI is not in the forecasting game, it is nice when general expectations are mostly born out in reality.
Expectations coming into 2017:
• Earnings would continue to rise – check.
• Interest rates would stay low – check.
• Oil would be mostly stable in the $40 -$60 range – check.
• The US dollar seemed likely to fall – check.
• The Core Equity Portfolio would return to its past form once election rhetoric passed – check.
• The Market Income Portfolio would continue to generate income numbers – check.
• We’d experience a market correction by summer – big fat X.
2nd Half Outlook: Rather than a lengthy essay, here is a bullet point summary of current ACI expectations for the 2nd half. The future is inherently unknowable, especially in the very short term – therefore these expectations are also inherently limited and subject to change as a result of shifts in data trends.
• Expect earnings to continue to rise.
• Oil to generally move with a range of $40 and $60.
• The dollar to stabilize a bit lower than it is currently.
• Interest rates to continue to stay low, with a max of 25- 50 additional basis points added to the Fed rate by year end.
• Inflation to remain muted.
• US consumer to continue to strengthen.
• Manufacturing to maintain stability.
• Wages to rise incrementally.
• Unemployment to fall incrementally (even as measured by U6).
• A market correction which will likely be an entry point.
• Stocks to broadly hold most gains and potentially rise into year end.
• Tax reform.
If tax cuts are taken off the table, that seems the most likely spark for an overdue pullback in the broader market, short of a nasty geopolitical surprise.
Barring recession, pullbacks in equities are still opportunities.
Corrections should also be viewed as an opportunity to evaluate longer duration bonds.
Portfolio Performance Table

Results are reported at an aggregate, portfolio level. Individual account results within each portfolio may differ due to several variables.
If you have questions about individual results, please get in touch.
Portfolio Commentary:
ACI Core Equity: + 10.6% Year-to-date. Core Equity returned to its historical form for the 1st half of the year, leading the S&P 500 despite being nearly 20% cash across all accounts. The US Dollar has lost about 8% year-to-date against a basket of global currencies, and this hurt performance in the portfolio. With valuations high, free dollars are being dollar cost averaged in, with a target 10% cash buffer held against correction. While prudent, this has certainly negatively impacted performance.
ACI Market Income: +3.4% Year-to-date. Market Income has an inherently defensive stance, and seeks to invest in sectors or indices that are trading at or below historical fair value, or that represent better relative value (and higher margin of safety) than the broad market. This led to an investment in the retail sector during the fall of 2016. Fears of Amazon have since crushed the retail sector, driving it down over -15% from the 2016 high. This has negatively impacted the overall performance YTD for Market Income. The expectation for the 2nd half of the year is for a retail recovery. We will see if reality bears this out. Income Year-to-date from the portfolio has been nearly on target, and has more than offset the unrealized, and likely short term, losses in the underlying sector equities.
ACI Full Cycle Portfolio: +4.3% Year-to-date. This portfolio is doing well for the year, and slightly ahead of targets on the strength of emerging markets, high yield corporates, and the relentless climb of most sector stocks. The portfolio risk profile continues to be approximately on par with investment grade bonds, while benefiting from sufficient stock exposure to give potential for some growth.
Durable Opportunities Portfolio: (0.9%) Year-to-date. This portfolio has a very heavy cash position because of high valuations and therefore slim purchase opportunities. Dollar losses have worked to drag down performance. The portfolio also took on a position in Ross Stores which has since been punished along with the rest of the retail sector, including another portfolio holding, TJ Maxx. In these two cases, it appears the baby has been thrown out with the bathwater. Both companies operate in a space that is Amazon resistant if not Amazon proof – curated, low cost items bought at discount and then resold at price points where shipping costs make competition from Amazon problematic. Many items are also “high touch,” meaning people want to see and hold them prior to purchase. These stores almost operate as brick and mortar Amazons – they buy in bulk at discount which insulates margin, have an ever-changing inventory which lends itself to the customer experience, and run relatively lean in terms of operating costs. They were eating the lunch of other retailers for years, and there is no indication that Amazon’s growth into the apparel or home goods space is going to change that.
Universal Insurance Holding’s strong performance in 2016 has retraced about half of the 2016 gains.
These factors have all damaged short term performance. The expectation is to see this mitigate over the 2nd half as earnings continue to gain ground at all three companies despite Amazon fears. The market is currently in love with the idea that retail has become a zero-sum game with Amazon the only winner. While it is a power in the space, online purchase accounts for less than 14% of retail purchase activity. Amazon’s market share in retail spending, while immense, is still less than 5%. The death of retail is mostly exaggerated. CLICK HERE to read a recent article on Amazon and the retail sector.
Market Momentum Portfolio: +4.3% Year-to-date. This portfolio has been in cash since March. The expectation is for another opportunity to deploy that cash before year end.
Multi-Manager Income: +2.6% year-to-date. The portfolio is performing slightly ahead of expectations YTD in a challenging environment for fixed income.
As always, please reach out with questions or comments.
Dak
Dak Hartsock
Market Strategist
ACI Wealth Advisors, LLC
Process Portfolios, LLC.
Additional Disclosures regarding hypothetical illustrations:
The above hypothetical returns discounts the emotional impact events might have on an investor and makes assumptions with the benefit of hindsight. Past performance is no guarantee of future results.
There are inherent limitations in hypothetical or model results as the securities are not actually purchased or sold. They may not reflect the impact, if any, of material market conditions which could have has an impact on the manager’s decision making if the hypothetical portfolios were real. Hypothetical performance is shown for illustrative purposes only and should not be interpreted as an indication of performance of any ACI portfolio.
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