FAR BE IT FOR me to be a party pooper.
On March 9, this bull market, the second longest in history, became eight years old, but if we have to play class monitor, so be it.
Corporate tax relief, infrastructure spending, Affordable Care Act change, and a more lenient regulatory approach are the four legs that support the market’s pro-growth Trump jump. Tax cuts are arguably the most important. It’s a discrete item markets love to latch on to. And, that is the reason we have taken the job as class monitor – see Update-Washington below for our progress report – zilch!
And, here are some sobering points to keep in mind:
- The rally impetus from the so-called Trump trade seems depleted. There’s a bit of worry over whether those policies will get implemented.
- There also is concern that the U.S. economy isn’t expanding as strongly as hoped. The recent unexpected rally in Treasury bonds has stock-market watchers worried growth is slowing.
- Two weeks ago, the U.S. launched missiles at a Syrian airfield, and American relations with both Russia and North Korea are tense.
- French elections begin April 23; markets fear a victory by nationalist candidate Marine Le Pen.
- April 28 offers an expiration of Congress’ continuing-resolution budget bill. If there is no agreement on the measure by then, the government could shut down the next day.
- With a market price/earnings ratio of 18 times, stocks are not cheap, though the 2018 price/earnings is a more reasonable 16 times—assuming that the Standard & Poor’s 500 index earnings per share grow 12% in 2018, as analysts expect.
Can we push all the political “noise” aside and finally talk about earnings? It’s that time again when the stock market will focus on corporations reporting their sales and profits – called “earnings season,” one of the underpinnings of stock market values and the entire economic picture. Hence, it’s the reason why Business Profitability is one of the elements of the Heat Map (below).
According to a highly respected earnings forecaster, FactSet, earnings for the S&P 500 companies are expected to grow 9.1% for the period ending March 31 compared to one year earlier. If true, this would mark the highest growth quarter since Q4 of 2011. A strong showing like this may offset some or all of the negative effect of no progress in Washington DC on fiscal policy changes (see Update-Washington for additional information).
Tamarac is honored to receive the 2017 Family Wealth Report Award for Best Portfolio Management Application for our Advisor View™ software. And, just last winter, Advisor Rebalancing® received the best-in-class award from WealthMangement.com.
Valley National Financial Advisors uses this software to help manage our relationship with you. We really look at Tamarac as a strategic partner to our business. We think of Tamarac as thought leaders because they are always looking for innovative products and solutions to help us better service clients. That’s the reason we chose them a couple years ago after a long a due diligence project.
Tamarac supplies the e-Vault client portal for your use. During 2017, Tamarac and Valley National Financial Advisors will be rolling out important and useful advancements in the client portal. Stay tuned for more information.
TBD (=To Be Determined). This seems the mode of governing of the Trump Administration. With so many contradictions and cross currents in Washington, experts are having difficulty predicting the next step for the Trump team. Hence, the reason to take an attitude of TBD.
Why are we so closely monitoring political moves in Washington? Because staff serving on Congressional Committees, by making leaks about legislation in process, can move markets more than the FED.
The markets right now are incredibly dependent upon fiscal policy (fiscal policy is the means by which a government adjusts its spending levels and tax rates to influence the U.S. economy).
Fiscal policy is the brother strategy to monetary policy through which the Federal Reserve Bank (the FED) adjusts the U.S. money supply to influence the U.S. economy. For many years, the FED was the only game in town. Now, many believe the FED’s ability to influence the economy has withered. Maybe, just in time, the government is able to rev up fiscal policy.
So many discussions are happening behind the curtains in Washington. We are not privy to these discussions which creates difficulty in forecasting whether Congress will be able to move on major legislation such as income tax reform, infrastructure spending, and fixing the Affordable Care Act. But, there is a visible indicator available to give us a heads up on how well Congress is working with the Trump administration: the Nomination process (approval or disapproval of Trump nominees for the Cabinet).
As of today, the U.S. Senate has not voted against any Trump nominee. If this trend continues, this would be a sign of the Trump administration’s success in working with Congress to push forward its agenda. We will know soon because the Senate is expected to vote on Betsy DeVos Tuesday for Secretary of Education and Jeff Sessions for Attorney General. Both are controversial nominees and their nominee votes are uncertain. So, these two pending votes are a visible sign of the working relationship being shaped.
Artificial Intelligence (AI), Robotics, and Virtual Reality (VR) are 3 of the next big thing(s) during the upcoming 5 to 25 years. The winner in AI is hard to predict at this time. Robotics applications are popping up in many applications. On the other hand VR’s time is just around the corner. Here is an article from ScienceInfo.net which spells this out.
The market for virtual reality (VR) technology could be a trillion-dollar industry by the year 2035, according to new research from a forward-looking analysis unit of the investment bank Citi.
Citi’s report arrived the same week that Sony released the PlayStation VR, a virtual reality headset aimed at owners of its video game console. 2016 has seen other high-profile headsets released by competitors, including the Oculus Rift and the HTC Vive. “VR is now firmly on the radar as an investment theme and is expanding as an industry and we believe it will be used in a wide range of applications and in a number of different industries going forward,” Kathleen Boyle, managing editor of Citi GPS (Global Perspectives & Solutions), said in the report on Thursday.
In fact, VR technology is already making its impact felt in several ways, with many companies exploring its applications. Beyond gaming and entertainment, VR is being used in the tourism sector, for education and in health care. In addition, DeLoitte published a survey in August which found 88 percent of mid-market companies (firms with annual revenue of between $100 million and $1 billion) were using some form of virtual or augmented reality as part of their business.
Citi predicts hardware sales, specifically of headsets, will be the primary driver of the industry’s growth and the VR market will be worth $692 billion by 2025, rising to more than a trillion by the following decade…. and is expected to rise to $4 trillion by 2030.
All major content providers are piling into this area, and user-generated content is poised to explode as more affordable 360-degree cameras come to market,” he said in a press release in August. We envision a world where ‘surroundie’ photos and videos become the next big thing, especially as 360-degree content can be so easily shared with more than 1.7 billion Facebook and YouTube users,” he added.
If you are charitably inclined and have adequate cash flow available, might it be time to put the brakes on Required Minimum Distributions taken from your IRA’s in the early months of the year? Depending on what tax proposals eventually make it into law, those 70 ½ and older may benefit more from making their larger charitable contributions directly out of their IRA whereby that income won’t be reported on page 1 of your return. These types of charitable distributions are not deducted, therefore, on the Schedule A for itemized deductions. With proposed higher standard deductions in the possible 2017 Income Tax Simplification, many older taxpayers won’t benefit from itemizing anymore and wouldn’t receive a tax benefit from charitable giving. If you make your charitable contributions through the Qualified Charitable Distribution (QCD) strategy, there is an opportunity to save income taxes whether you itemize or not. Ask us for details and what you should review to make sure this strategy is available to you.
The U.S. stock market has jumped since the November 8th election. Many investors are asking if now is a good time to “take profits” and sit on the side lines to wait to see what happens. But this strategy is a form of market timing. If there is one thing we have learned from 2016 is that it is exceptionally difficult to time the market. Instead of market timing, let’s identify and track the 4 initiatives the U.S. stock market is speculating will be successfully accomplished early in the Trump administration.
If Trump administration successfully accomplishes the 4 initiatives, then the stock market has speculated correctly and could trend to higher and higher levels over the next 4 to 5 years. However, if his administration is unsuccessful in accomplishing the 4 initiatives, then stock market investors may find themselves disappointed with a correction sending shares values back down to levels witnessed prior to the November 8th election.
The outcome of the 4 initiatives have a substantial impact on the factors in the “Heat Map”
The 4 Trump administration initiatives upon which the stock market is speculating are:
- Tax cuts and tax reforms benefiting most individuals and businesses.
- Infrastructure spending of up to $1 Trillion over the upcoming 7 to 10 years.
- Affordable Care Act amendment, reform or reorganization.
- Roll back of government regulations and Executive Orders considered to be difficult for businesses.
As the action happens in Washington on these 4 initiatives, don’t be surprised if the beginning of 2017 is wilder than the end of 2016.
We will report in future issues on the progress on each initiative.
Interest rates are rising! And, we suspect interest rates will rise much further. A most respected bond market guru, Jeffrey Gundlach, CEO of DoubleLine Capital and one of the world’s most successful bond investors, predicts a rise in bond yields that could lift the yield on the 10-year Treasury note to 6% in the next four or five years from its current level of 2.5%.
Trump’s pro-business agenda is inherently “unfriendly” to bonds, Gundlach says, as it could to lead to stronger economic growth and renewed inflation. Gundlach expects President-elect Trump to “amp up the deficit” to pay for infrastructure projects and other programs. That could produce an inflation rate of 3% and nominal growth of 4% to 6% in gross domestic product. “If nominal GDP pushes toward 4%, 5%, or even 6%, there is no way you are going to get bond yields to stay below 2%,” Gundlach says.
Additionally, the current FED Chairperson Janet Yellen’s tenure may end in 13 months. The new FED chair could sell, over time, the $3.5 Trillion of Treasury Bonds and mortgages the FED acquired since 2008. We reckon this will add substantial pressure to lift interest rates even higher.
NOTE: Keep in mind, rising interest rates reduces the price of bond and bond mutual fund currently owned. The longer the bond maturity, the larger the drop in price.
ACTION: Now is the time for implementing the following portfolio strategies: (1) eliminate long term bonds (over 15 years maturity) and long term bond mutual funds; and (2) reduce the holdings of intermediate term bonds and intermediate term bond mutual funds; and (3) invest the proceeds of (1) and (2) into short-term bonds.