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First Quarter 2017 Market Report

Our first quarter report discusses the recent pickup in global economic activity and earnings, as well as characteristics prevalent at different stages of a typical economic cycle.

The Dreamliner Economy

Boeing is an iconic American multinational corporation that is one of the largestaircraft, satellite, and defense contractors in the world. Boeings 787 Dreamliner is a remarkable example of industry-leading technology and design. It was thefirst aircraft made primarily of advanced composite materials, giving it unparalleled fuel efficiency and range, helping airlines to increase profits, offer new routes, and mitigate environmental effects. Its on-board electrical system is
five times more powerful than conventional aircraft, providing new capabilities and passenger comforts. The Dreamliner is assembled north of Seattle in a complex so large, it covers over 100 acres and would create its own weather insidewithout proper ventilation. The aircraft is helping to maintain Boeings aerospace leadership and serves as an illustration of American ingenuity.

Parallels between the Dreamliner and U.S. economy are noteworthy. The aircraft’s advanced technological design gives it a clear advantage over products from Airbus and other competitors. Similarly, Americas technological prowess is a key advantage for our economy and businesses as we compete on the global stage. Leading U.S. technology companies such as Microsoft, Amazon,Facebook, Uber, Apple and others are transforming the global business landscape. Technology has also helped push the U.S. toward energy independence through increased energy efficiency and domestic supply growth. There is little doubt we have been experiencing a period of rapid and disruptive technology-driven change.

As with all aircraft, the Dreamliner seeks to optimize the physics of thrust, lift, drag, and weight to create efficiencies in flight performance. In the same way, our economy benefits from the thrust of business and consumer spending and the lift of fiscal and monetary policy decisions. The economy fights against the drag and weight of regulation, high debt levels, demographics,mismatches between the skills of workers and jobs available, and political dysfunction. The Dreamliner has a complex global supply chain and customer base. While assembled in the U.S., 70% of the aircraft’s components are manufactured in 12 different countries and sold to 64 customers around the world. Similarly, the American economy is interconnected across the globe. Both are susceptible to the risks of rising protectionist sentiment. Given the significance of Boeing, tactics by the U.S. to erect trade barriers are sure to be met with retaliation that would likely impact key U.S. industries and products like the Dreamliner.

While the future is bright for the Dreamliner, its roll-out has been a story of ups and downs for Boeing. The aircraft made its maiden flight in December 2009, around the time our economy emerged from recession. The complexity of the Dreamliner’s design coincided with a series of frustrating setbacks for Boeing, including battery problems, supply chain issues, and design and manufacturing troubles. Despite its many attributes, the Dreamliner became known as the longest delayed program in the company’s history. Many Airline companies have also deferred capital spending despite the need to upgrade their aging fleets. With flaws addressed and the airline industry in a healthy condition, Dreamliner production appears poised to accelerate. Over the same time period, the U.S. economic expansion has been uneven and anemic as numerous drags pushed against the economy’s takeoff. A series of setbacks including China growth concerns, fears of a Euro-area breakup, a collapse in commodity prices, and political dysfunction in Washington have all helped to suppress and delay normal cyclical tendencies. Like the airline industry, businesses have been generally hesitant to spend. At this point, however, the U.S. and world economy appears to by accelerating at last, following several years of fits and stops, general cautiousness, and unusual market dynamics. The pages that follow provide an update on the current state of market affairs and our opinion of the outlook ahead.

Click below to download full report.

Investment Advisory Team

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