The probability of a bond market sell-off has risen during the past 3 months due to: (1) an increase in deficit spending due to the new tax law; (2) an increase in deficit as a result of the Bipartisan Budget Act; (3) the Fed’s decision to sell $200 to $400 Billion of Treasuries instead of buying Treasuries; and (4) Secretary Mnuchin’s statements on allowing a weaker dollar.
This is something we have anticipated for some time. Interest rates are beginning to move higher, from almost 10 years at historic lows. If interest rates were to rise sharply, the principal value of bonds and bond mutual funds already owned in your portfolio may decrease. Long-term maturities would decrease the most. In preparation, our asset allocation models have substantially reduced the maturity of bonds in an attempt to manage the effect of a bond market selloff (if one were to occur). We are watching this event closely and will keep you posted on any further impact this may have on our overall fixed income strategy.
Last week we reported on the fact the stock market had indeed suffered a “Correction.” A Correction is a series of stock market declines over several days or weeks leading to a 10% to 20% decline from a stock market high. The stock market typically recovers from a Correction in a relatively short time of 3 to 12 months.
The U.S. stock market has jumped since the November 8th election. We identified 4 initiatives on which the U.S. stock market is speculating to be successfully accomplished early in the Trump administration. What will happen next? It is still to be determined!
The 4 initiatives will have a tremendous influence on the “Heat Map” which forms the basis of our forward looking view of the U.S. economy. I consider the success or failure of the 4 initiatives to be “leading” indicators for the Heat Map.
Below are the 4 Trump administration initiatives upon which the stock market is speculating and what progress, if any, has been made:
Tax cuts and tax reforms benefiting most individuals and businesses. THE MOST SIGNIFICANT TAX LEGISLATION IN A GENERATION WAS SIGNED INTO LAW LAST YEAR. CUMULATIVE PROGRESS TOWARD GOAL: 100%
Infrastructure spending of up to $1 Trillion over the upcoming 7 to 10 years. PRESIDENT TRUMP RELEASED DETAILS ON THE INFRASTRUCTURE PLAN LAST WEEK. MANY EXPERTS ARE CONCERNED THE PLAN WILL FALL SHORT OF WHAT IS NEEDED SINCE IT DEPENDS UPON STATES AND LOCAL GOVERNMENTS TO COME UP WITH THE VAST MAJORITY OF INFRASTRUCTURE MONEY. WE ARE DECREASING CUMULATIVE PROGRESS TOWARD GOAL FROM 35% TO 20%.
Affordable Care Act amendment, reform or reorganization. THE TAX REFORM LAW REMOVED THE REQUIREMENT EACH INDIVIDUAL OBTAIN HEALTHCARE COVERAGE. PROGRESS TOWARD THIS GOAL IS 35%.
Roll back of government regulations and Executive Orders considered to be difficult for businesses. ROLL BACKS HAVE CONTINUED. CUMULATIVE PROGRESS TOWARD GOAL: 55%
As the action happens in Washington on these 4 initiatives, don’t be surprised if the political “tug and pull” contest results in a wilder than normal stock and bond market.
We will continue to report in future issues on the progress on each initiative.
Most of the time, the U.S. stock market looks to 3 factors (call them the “pillars” which support the stock market) to support its upward trend – let’s grade each of the pillars.
CONSUMER SPENDING: This grade is A+ (extremely favorable). Consumer spending is expected to strengthen as individuals with lower tax rates spend their windfalls.
THE FED AND ITS POLICIES: This factor is rated C- (Below average).
BUSINESS PROFITABILITY: This factor’s grade is A- (very favorable). Corporations are in the midst of releasing 4th quarter earnings. Earnings season has been stellar, with S&P profits growing at a fast pace.
OTHER CONCERNS: The “Heat Map” is indicating the U.S. stock market is in OK shape ASSUMING no international crisis. On a scale of 1 to 10 with 10 being the highest level of crisis, we rate these international risks collectively as a 5. These risks deserve our ongoing attention.
Last week, U.S. Stocks and Foreign Stocks increased; however, Bonds decreased. During the last 12 months, STOCKS outperformed BONDS.
Returns through 2-16-2018
1-week
Y-T-D
1-Year
3-Years
5-Years
10-Years
Bonds- BarCap Aggregate Index
-.2
-2.1
1.0
1.2
1.8
3.7
US Stocks-Standard & Poor’s 500
4.3
2.5
18.7
11.5
14.8
9.6
Foreign Stocks- MS EAFE Developed Countries
4.3
1.4
21.1
6.9
7.4
3.3
Source: Morningstar Workstation. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. Three, five and ten year returns are annualized excluding dividends.
The show airs on WDIY Wednesday evenings, from 6-7 p.m. The show is hosted by Valley National’s Laurie Siebert CPA, CFP®, AEP®. This week Laurie will discuss: “Your tax questions”
Laurie will take your calls on this or other topics. This show will be broadcast at the regular time WDIY is broadcast on FM 88.1 for reception in most of the Lehigh Valley; and, it is broadcast on FM 93.9 in the Easton and Phillipsburg area– or listen to it online from anywhere on the internet. For more information, including how to listen to the show online, check the show’s website www.yourfinancialchoices.com and visit www.wdiy.org.
Please join me in welcoming Stefany Keiser to our Valley National team as Administrative Assistant. The firm will be releasing an official announcement this week, but I wanted to let you know first. Stefany will be available immediately to assist my clients with scheduling appointments and taking questions. Of course, the rest of your service team will be right alongside to offer additional assistance and to help Stefany become familiar with our procedures and our people. They have already completed a week of intensive training with her on our systems and processes. I am confident that you will find your experience with Stefany to be everything you have come to expect from my team.
Stefany comes to us with 17 years of client service experience. She is originally from Easton and now resides in Bethlehem. She can be reached at skeiser@valleynationalgroup.com or by phone at extension 118.
Thomas M. Riddle Founder & Chairman
Valley National Financial Advisors
Last week, the S&P 500 gained 4.3%, to 2732.22, its best showing in more than five years. Not to be left out of the fun, the Dow Jones Industrial Average climbed 1028.48 points, also 4.3%, to 25,219.38, while the Nasdaq Composite jumped 5.3% this week, to 7239.47.
Even better, the S&P 500 closed the week on a six-day winning streak, gaining 5.9%. The only problem: After a run like that, the market may not have the juice to push much higher. “This seems like it’s a bit too aggressive,” says MKM Partners strategist Michael Darda. “Anybody with a contrarian eye would say this is too much, too fast.
Market psychology could play a big part in where we go next. Investors who bought stocks on the first day of the year have gained 2.2%, and are probably not too worried. But if they chased stocks out of the gate this year, they could be sitting on losses. Some might hold on in the expectation of further gains, but others might decide to take profits. Either way, the wild ride will make everyone reconsider what they own and why they own it—and whether they still should. “Everyone has to reset,” says Instinet’s Frank Cappelleri.
More volatility would not be a surprise—or out of the ordinary. Consider: In 2017, the S&P 500 had just eight 1% moves in either direction; this year, there have already been 10, Cappelleri says. At this rate there’d be 78 1%-plus moves in 2018. While that seems unlikely, it’s not out of the question, as the rolling 12-month average of 1% moves spiked over 160 by the end of the financial crisis in 2009. “This suggests there’s a high probability that we’ll see more large moves in 2018,” Cappelleri says.
But a pickup in volatility doesn’t have to be a death knell for the bull market, he says. In 1996, a year that followed one that had been as calm and as strong as 2017, the number of 1% moves picked up, but the S&P 500 still gained 20.3%. So don’t be surprised if the market finishes higher this year.
