Monthly Archives: January 2017

The Plow Horse is Dead – Long Live the Race Horse

Race horse

We have referred to the economy over the last decade as the “Plow Horse Economy.”  There has been a huge increase in technology available to the economy over that period of time.  “Fracking” has unlocked huge oil and gas reserves in the energy sector.  The “Internet of Things” is tying our appliances together, automating our homes, even allowing us to control them with voice commands.  Self-driving cars are becoming a reality faster than I believed possible.  3D printing is revolutionizing production processes.  Yet despite this dazzling technological revolution, the economy is only managing 1.2% GDP growth.

Why?

Many analysts believe that if we compare the economy to a horse, we have a thoroughbred economy that’s plodding along like a Plow Horse.  The problem is that the rider is too heavy.    That rider is the government.  It’s holding growth down.  In the year 2000 government was 17.6% of Gross Domestic Product (GDP).  In 2016 it was 21.1% of GDP, an increase of 20%.  That’s a big move from the private sector to the public sector.

Keep in mind that government doesn’t manufacture anything.

On top of that, government today regulates virtually everything, generating a hidden cost to producers and consumers.  Some analysts think it’s a miracle that the economy actually grew despite increased borrowing, taxes and regulation.

The incoming Trump administration has a staunchly pro-business agenda.  The focus on jobs and economic growth is front and center.  A new executive order instructs federal agencies to halt the issuance of more regulations, and the new President has indicated a desire to reduce them by 75%.   Another executive order has frozen hiring of federal employees, opening the door to replacing government employees with technology, something that has happened in the private sector.  Yet other executive actions advance the approval of the Keystone XL and Dakota Access oil pipelines – using American steel – creating new high-paying construction jobs and indicating an interest in making America energy independent.  Reducing tax rates, especially the high corporate tax rate, is another Trump administration objective.  It’s the carrot to encourage companies to build here, even as he waves the stick of high tariffs for goods brought in from overseas.  It’s getting a respectful hearing from otherwise skeptical business leaders.

These actions are not going to be enough, but they are indications that the new administration is determined to streamline government and incentivize private industry to grow.  According to Brian Wesbury, Chief Economist of First Trust, the earning per share of the S&P 500 is estimated to be $130, an increase of 20% in 2017.  Growth in earnings of that magnitude can justify an increase in market valuations and add a few percentage points to the annual GDP.

To get back to our horse analogy, it looks as if the jockey riding the horse will be put on a diet.  If that happens the thoroughbred who was a “Plow Horse”  may become a “Race Horse.”

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Dow Breaks the 20,000 level

The Dow Jones Industrial Average reached another milestone today.  The Dow broke through 20,000 as traders cheered.

For a little perspective here’s how the market reached past milestones.

dow-jones-milestones

A few points to remember.  There have been long periods when the Dow treated investors like riders on a roller coaster:  lots of swoops and slides only to end up where you began.  During those periods people made money with astute stock selection, not by buying “Mr. Market.”  We believe that those times will come again.

  • It took from 1929 to 1954 for the Dow to regain its previous high.
  • It took ten years – from 1972 to 1982 – for the market to break through the 1,000 level.

Keep in mind that the 1,000 point move in the Dow at the current level is just a little over 5% and is therefore not nearly as meaningful as a move from 1,000 to 2,000, a move of 100%.  But it’s still an important psychological barrier that had to be broken for the market to move higher.

The move makes sense from both a technical and fundamental standpoint.  Both retail and institutional investors are positive, as we have noted in the past.

The incoming Trump administration has moved with amazing speed to demonstrate their desire to increase the level of economic growth as a way of increasing job and wage growth.  They have expressed policy preferences for lower taxes, reducing regulations that stifle business development, and have been encouraging companies to build their businesses in the United States rather than overseas.

The trend is clear.  The only thing that could derail this train is a massive change in consumer sentiment or an external factor such as a war or other calamity.  The latter are known as “Black Swan” events and we must always keep in mind that they can occur.  We manage our portfolios with those possibilities in mind.

Eventually, valuations will get too high and the inevitable correction will occur.  In the meantime, we enjoy the ride while keeping a close eye on events.

Market Perspectives and Outlook

In 2016, the general election dominated the news headlines while the economy continued its slow slog for most of the year.

Stocks began the year in a slump, losing 10% in the first six weeks and then meandering sideways until July.  The markets rallied in the third quarter, followed by another decline until the election.  That’s when Trump’s surprising win started a rally that has carried the market to nearly 20,000 on the Dow.

dji_chart1

U.S. equities have held their gains since the election, while definitive sector rotations indicate more confidence among investors.  We believe the bull market will continue, although the sharp gains seen recently may give way to more sideways movement and/or potential pullbacks.

Improving economic data alongside a perception that the incoming Trump administration will be more business-friendly has bolstered both stock and Treasury yields.

The Federal Reserve raised interest rates in December and indicated that they expect further rate increases in 2017.

While it remains to be seen how much of Trump’s populist agenda will be embraced by the Republican Congress, a survey of 177 fund managers the week following the elections found they were putting cash to work  at the fastest pace since August 2009.

We always want to be good stewards of our client assets.  As such, we are participating in the market’s growth while at the same time remaining aware that the future holds many uncertainties, especially with the change in government direction and policy as we head into 2017.

As always, we value our relationship with you and welcome your comments and suggestions.

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The Financial Planner as a Healer

[This is the most popular post we have published; it’s worth posting again]

Money is a significant source of stress for most people.  In many studies, it ranks above issues such as work, children and family.  Chronic financial stress is often the leading cause of family break-ups.

Chronic stress is also associated with all sorts of health problems, psychological problems, marriage conflicts and behavior issues such as smoking, excessive drinking, depression and overeating.

Men and women under stress have often relied on medical and mental health professionals.  However, financial planners are uniquely positioned to help people address what is likely the number one source of stress in their lives – their relationship with money.  Dealing with these issues head-on with a financial planner can lead to improved emotional and physical health, an improvement of work-related problems and improved relationships with family and friends.

A competent and caring financial planner does a great deal more than manage investments or create a financial roadmap.  He listens and empathizes with the conflicting issues that people face when attempting to manage their personal finances.

Discussing the issues that cause worry with a financial planner can lead to setting realistic goals, analyzing alternatives, prioritizing actions and implementing an easy-to-follow plan.  Just as important, it allows the client and the planner to review progress on a regular basis.

As a result the client gets a sense of personal control over his or her finances.  Someone who is in control of their life has much lower stress than someone who feels that events and outside agents control them.

For a relationship between a client and a financial planner to work well together, they must have shared views and expectations of financial planning, financial markets, investment philosophy, and managing risk.  An initial meeting between a client and a financial planner should establish a comfort level and determine whether the planner is actually interested in the client, or just the client’s money.

The planner’s goal should be to help their clients organize their financial affairs, and to discuss the client’s past, present and future – including death.  The planner should create a level of trust that allows him to keep the client from self-injury, which often results from fear surrounding money.  The financial planner should provide a sort of reality check to the client, reducing both excessive pessimism and irrational optimism.  A client should feel able to discuss money honestly and openly with their planner without a fear of judgment.

In many ways, a financial advisor can be the confidant to whom you can take your financial concerns … and make it all better.

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