Category Archives: Trump

Market reacts to French election, tax cuts and earnings

The stock market had two back-to-back days with the Dow Jones Industrial Average (DJIA) up over 200 points.  On Monday the market was reacting to the first round of elections in France.

The French election for President is often a two step process.  If a candidate gets over 50% of the vote in the first round of voting he or she is declared the winner and becomes President.  If no one gets to 50%, the two top vote getters face a run-off election which decides the Presidency.

In the first round that just ended, the candidates of the major French parties that had run the country for decades did not make it to the run-off.  Instead, Marine Le Pen (usually described as “Far Right”) and Emmanuel Macron (usually described as a “centrist”) were the two top vote getters.  They will face off on May 7th with the winner becoming President of France.

Macron, age 39, received 23.8% of the vote while Le Pen scooped up 21.4%.  Macron formed his own party, splitting off from the Socialists.  Macron is best known for marrying his teacher, a woman 25 years his senior.

It is generally assumed that Macron will win the next round with the French establishment uniting against Le Pen who wants to stop immigration and wants France to pull out of the EU.  The results of the balloting caused a relief rally in expectation that France will stay the current course and remain in the EU.

The Tuesday market action was driven by exuberance over the Trump administration announcement that they were proposing a reduction in the corporate tax rate from 35% to 15%.  If this passes, next year’s corporate earnings would be higher.

On the earnings front some of the big names in the DJIA reported better-than-expected earnings.  Caterpillar, McDonald, Du Pont and Goldman Sachs were the biggest beneficiaries.

Stay tuned.

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The Trump Trade after three months.

The election of Donald Trump was followed by what many called “The Trump Trade.”  Based on the promises made by Trump during the campaign: to lower taxes and reduce regulations – two factors that inhibit economic growth – the stock market rose sharply.  But it’s going to take time and a lot of hard bargaining to actually get to the point where real economic benefits result.

Brian Wesbury, Chief Economist at First Trust:

As we wrote three months ago, it’s going to take much more than animal spirits to lift economic growth from the sluggish pace of the past several years. Measures of consumer and business confidence continue to perform much better than before the election. But where the economic rubber hits the road, in terms of actual production not so much.  It looks like real GDP growth will clock in at a 1.3% annual rate in the first quarter.

He says that we still have a “Plow Horse Economy” and it will take time to unhitch the plow and saddle up the “Racehorse.”

Trump has signed a number of executive orders that will have an impact on regulation, but the bureaucracy is still staffed with the last administration’s appointees and the pace of approving new appointments is glacially slow.

Waiting is the hardest part.

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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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Tectonic Shifts – Looking Ahead to 2017

The election has created tectonic shifts in government and promises to make bold changes in the economy.  We have been gathering consensus views from some leading financial analysts for 2017

  • Global interest rates are going up.
  • Global inflation is going up.
  • Global growth is going up.
  • Recession risk is going down.

A new consensus is also building.  The rise of nationalistic self-interest is upsetting the old order the world over.  For the past decade central bankers have been in control of economic policy throughout the world.  It has resulted in low or even negative interest rates in an effort to stimulate economic growth.  The result has been like pushing on a string.  Growth has been slow (the string as a whole hasn’t been moving) and the middle class in the developed world has seen their wages stagnate and their jobs disappear (the middle of the string) while those at the top (the far end of the string) have been virtually unaffected.  It’s part of the reason for the change in political leadership in the U.S. and the re-emergence of economic nationalism as evidenced by the Brexit vote in Britain.

As central bank leadership takes a back seat to aggressive fiscal policy, we can expect political leadership to focus on job growth and economic relief for the long-neglected middle class.  Domestically, here is what we expect to see:

Tax reform:  Trump’s campaign promised corporate tax reform.  To make American companies more competitive globally, he has proposed reducing corporate tax rates from 35% to 15%.  A special 10% rate is designed to repatriate corporate profits held offshore.

Individuals will be taxed at three rates depending on income: 12%, 25% and 33%.

Fiscal policy: The Trump administration wants to spend new money on infrastructure: transportation, clean water, the electric grid, telecommunications, security, and energy.

Health care: Trump wants to repeal and replace Obamacare.

Trade: The new administration has vowed to withdraw from TPP (Trans Pacific Partnership) and renegotiate NAFTA (North American Free Trade Agreement).  They also intend to challenge China regarding currency manipulation and unfair trade practices.

Immigration: President-elect Trump intends to establish new, tougher immigration controls to boost wages, build a wall along the U.S./Mexico border, deport criminal aliens and end sanctuary cities.

Economy: 25 million new jobs over the next decade is the goal of the incoming administration.  They aim to boost economic growth from 1.5% to 3.5% or 4.0% annually.

The Trump administration will focus on job creation, economic growth, infrastructure spending, reduced regulation, and energy independence while reducing governmental efforts to prevent climate change.  The people that Donald Trump has chosen for his cabinet are largely from the private sector; people that have backgrounds in running successful businesses and creating jobs.

These things are the primary reason that the stock market has reacted well to the election of Donald Trump.  Corporate earnings have been essentially flat for the past three years.  Professional investors see opportunities for renewed economic growth, which will increase corporate profits.  While we view this development with optimism, we always remain cautious.  We expect increased market volatility, especially if terrorist attacks continue throughout the globe.  We also expect interest rates to rise as the Federal Reserve brings rates to a more historically normal level.

We also see opportunities for the creation of new companies.  The number of publicly traded companies has dropped by nearly 50% since 2000.  At the same time, the number of companies that are held by private equity firms has grown explosively – by a factor of six!  This provides a great opportunity for privately held companies to go public and provide yet another opportunity for greater market growth.

As always, we remain cautious in keeping with our philosophy of preserving our clients’ capital.  Over the long term, we see the potential for a new American renaissance.

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The New Trump Economy

We have been talking about the “Plow Horse Economy” for quite a while now.  Low interest rates designed to spur economic growth have been offset by other government policies that have acted as a “Plow” holding the economy back.

Market watchers have assumed that the November election would see a continuation of those policies.  The general prediction was for slow growth, falling corporate profits, a possible deflationary spiral, and flat yield curves.

What a difference a week makes.  The market shocked political prognosticators by standing those expectations on their heads.

Bank of America surveyed 177 fund managers in the week following the elections who say they’re putting cash to work this month at the fastest pace since August 2009.

The U.S. election result is “seen as unambiguously positive for nominal GDP,” writes Bank of America Merrill Lynch Chief Investment Strategist Michael Hartnett, in a note accompanying the monthly survey. 

The stock market has reached several new all-time highs, moving the DJIA to a record 18,924 on November 15th, up 3.6% in one week.

Interest rates on the benchmark 10-year US Treasury bond have risen from 1.83% on November 7th to 2.25% today (November 17th), a 23% increase.  Expectations for the yield curve to steepen — in other words, for the gap between short and long-term rates to widen — saw their biggest monthly jump on record.

 WealthManagement.com says that

Global growth and inflation expectations are also tracking the ascent of Trump. The net share of fund managers expecting a stronger economy nearly doubled from last month’s reading, while those surveyed are the most bullish on the prospect of a pick-up in inflation since June 2004.

Investors are now also more optimistic about profit growth than they have been in 15 months.

Whether this new-found optimism is justified is something that only time will tell.  In the meantime to US market is reacting well to Trump’s plans for tax cuts and infrastructure spending.  Spending on roads, bridges and other parts of the infrastructure has been part of Trump’s platform since he entered the race for President.  It’s the tax reform that could be the key to a new economic stimulus.

According to CNBC American corporations are holding $2.5 trillion dollars in cash overseas. That’s equal to 14% of the US gross domestic product.  If companies bring that back to the US it would be taxed at the current corporate tax rate of 35%.  The US has the highest corporate tax rate in the world.  The promise of lower corporate tax rates – Trump has spoken of 15% – could spur the repatriation of that cash to the US, giving a big boost to a slow growth US economy.

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The Election is Over. Now What?

The general election is over and the people have spoken.  Donald Trump will be the 45th President of the United States.

The run-up to November 8th has shown that our country is sharply divided politically.  Some people will be happy and others disappointed by the result.  However, it’s important to avoid letting your personal political beliefs and emotions cloud your long-term investment decisions.

Our job as your financial advisor is to help you navigate your way through the upcoming economic and political changes.  Forecasters can be wrong, and we have seen that pollsters can be too.  We avoid making big bets based on crystal ball gazing.  So how do we see the future?

As students of history we think that countries that keep their governments relatively small, in terms of spending, regulation, and tax rates, will provide their residents with an advantage in pursuing financial prosperity.  Regardless of who won this year’s election, we think that economic growth in the U.S. will generally continue, even with the policy mistakes the winner may make.

Since 2009, we have experienced what we’ve been referring to as a “Plow Horse Economy.”  That means that the macro-economy has gradually recovered even as many people have not seen much of an improvement in their individual economic lives.  The overall economy has grown despite the fact that debt, regulation and political turmoil have acted as a “Plow” holding the economy back.  Despite this drag, the major U.S. stock indexes are up almost 50% over the past four years.

We remain constructive on the economy and the markets.  With the election in the rear view mirror, we expect the Federal Reserve to begin its long, slow walk to raising interest rates from today’s near-zero percent.  We expect those moves to be very gradual and to have little long-term effect on the market.

One other statistic makes us optimistic for the future.  Consumer spending is said to account for 70% of the U.S. economy.  Unfortunately, that vast middle class that we think of as the “average consumer” has not seen much in the way of a fatter wallet over the last few decades.  That was one reason for the popularity of Trump’s message to the middle class that he would restore good paying middle class jobs.  We believe that if he is able to follow through on this promise, a resurgence of earnings growth by the middle class will be a positive for the American economy, and hope that he is able to implement feasible policies to promote such growth.

 

 

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Who do you trust?

The latest issue of Wealth Management magazine dealt with the upcoming election.

One of the more interesting things about our recent presidential election (and it’s a long list) is that the traditional political battle lines have not only moved, they’ve been decimated—broken into such unrecognizable shapes that the head spins.

What the Editor found interesting is that neither candidate projects warm feelings toward Wall Street for different reasons.

For both parties and their supporters, Wall Street, and by extension financial services, is to be viewed with deep suspicion and skepticism.

The editor finds this troubling.  We’re not so sure.  When you turn your financial affairs over to another there has to be a certain level of trust.  However that trust must be reinforced over time and “Wall Street” has done enough damage to the trust that people have placed in it that it deserves to be viewed with suspicion and skepticism.

Trust is generated when promises made are promises kept.   The problem is that too often the promises that the major Wall Street firms have made were deceptive.  Wall Street firms like to pretend that they have the best interests of their clients in mind.  The truth is that the firms view their clients as customers and their brokers as the sales force.  The object is to generate commissions via the sales of products created to generate profits for the firm.  And if it benefits the client, that’s nice but it’s a by-product of the sales effort.

That’s why the growth of independent Registered Investment Advisory firms has been a good thing for people seeking investment advice that they can trust.  RIAs who charge fees for their services are not compensated for selling Wall Street products.  Because they work for their clients, not for Wall Street firms, they do not have divided loyalties.  They are supposed to be fiduciaries, not salesmen.  Not to say that there are no bad apples in the basket, but the vast majority of them will work to earn your trust.

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Just How Rich Is Donald Trump?

There is a problem with trying to figure out what a billionaire is worth. A lot of their assets are in things that are impossible to measure with precision.  The average individual can add up their bank accounts and investment accounts.  But once it gets beyond those numbers the exact value of “things” like homes gets murky.

For example, your home may have an assessed value, for tax purposes, of $500,000.  But the amount you can actually sell it for can range widely, often more than 10% of the assessor’s number.  So this typical homeowner can’t be sure of his net worth within $100,000.  So if the average American homeowner can’t determine exactly how much he’s worth, it’s a lot harder for a billionaire.  For example, some very wealthy people own sports teams and these are assets that are not publicly traded so their actual value is impossible to define as Donald Sterling found out when he was banned from the NBA.  The team was estimated to be $324 million but sold for $2 billion.

Donald Trump’s net worth includes lots of real estate, leaseholds and assets like the value of his brand name.  That means that the question of “how rich is Donald Trump” is a guesstimate not even Trump can be sure of.  But you can be sure that a man with his own Boeing 757 is rich.

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