We hope you are off to a productive start for 2017 and making some fun plans for the warmer days of spring.
Despite a regular dose of drama from our new President Donald Trump, the stock markets have continued to trend higher in early 2017. The prevailing expectation is the White House and Congress will successfully enact; increases in infrastructure spending, individual and corporate tax cuts along with regulatory reform, to help boost our American economy. The financial markets have been relishing the novelty of a new government in Washington committed to implementing these first fiscal policy changes in more than a decade. Over President Trump’s first 30 days in office, the Dow Jones index gained the most we have seen for a new presidential administration, since the beginning of Franklin Delano Roosevelt’s 4th term in 1945. The higher levels of confidence are evidenced by some of the lowest levels of stock market volatility we have seen since 2007. Our experience suggests that current market valuations are likely ahead of themselves and the pace of this post-election rally is unsustainable. Sooner or later, the Trump honeymoon will wane and the markets will “correct”. Ultimately, these pullbacks and periods of consolidation are normal, healthy and expected. Our diversified investment portfolios are strategically prepared to weather this future volatility.
In recent weeks, global markets have been moving sideways and appear to be digesting some of the gains they have enjoyed since the November election. Fortunately, we do not see this consolidation as an indication the extended market advance is over, as the steady stream of improving global economic reports show economies beginning to strengthen around the world.
For most of the last 10 years, global economic growth has been relatively slow and unsynchronized among the world’s geographic regions. Beginning late last summer, economic reports began to simultaneously improve in both developed and emerging economies. In February, consumer confidence reached its highest level in 16 years. Unemployment is declining, while global inflation finally appears to be shifting from deflation to reflation. We believe the 1.37% 10 year Treasury bond yield reached last July will mark the secular low for interest rates. Last week, as expected, Janet Yellen increased the Fed Funds target interest rate another ¼ point. We anticipate 2-3 additional increases by our Federal Reserve Bank in 2017 while the economy continues improving on multiple fronts. The large majority of our fixed income investments are already positioned in short-term duration bonds to preserve market values as interest rates trend higher.
Donald Trump took office promising a number of economic-policy changes for the United States. Like all his predecessors in the Oval Office, he has quickly discovered our country’s political system is designed to prevent rapid, large scale change. Our American democracy is structured to create formidable obstacles to that change, from the powerful legislative branch in Congress along with the State governments, to the independent courts and judicial system. We remain optimistic, despite these challenges, U.S. businesses will get their much anticipated tax and regulatory reform, but most likely in the second half of 2017. The near-term economic benefits of personal and corporate tax cuts are substantial and could help accelerate U.S. growth beyond the tepid 2% it has averaged since 2010. We believe Infrastructure spending increases may be more politically challenging and therefore unlikely until next year.
Questions and concerns regarding the new administration’s initiatives regarding health care insurance, budget, immigration policies and the potential impact of a border tax, all remain. We anticipate the final outcome of these initiatives, in addition to the fiscal policy proposals discussed above, will look significantly different from the proposals being discussed today. It is a certainty the ongoing drama in Washington will continue. As always, we remain vigilant and proactively posture investments to generate competitive risk-adjusted returns in the years ahead.
Sound Management For A Secure Future ™
This commentary contains forward looking statements and opinions. These opinions may not develop as predicted. It is our goal to help investors by identifying changing market conditions. However, investors should be aware that no investment advisor can accurately predict all of the changes that may occur in the market.