THE ELECTION – Uncertainty, unease, volatility, fear, - let’s just get it out there.
It’s hard to talk about market fundamentals when the intense emotions, mostly negative, are pushing rational thought and analysis way, way back in our minds and in most conversations. Despite many indications that modest market growth will continue into 2017, Gross Domestic Product (GDP) will continue to grow between 1.5% and 2%, and interest rates will stay lower for longer, despite the steady as she goes outlook the cost of hedging a portfolio against a downside loss just “jumped to the highest level ever recorded.” (Bloomberg 10-12-16)
But, let me try to paint a more measured picture of what we see and what that suggests we might see when the dust settles after the election.
With a growing economy we expect the equity markets to keep moving higher, although with far less momentum than previously. The fear of recession that was front and center in the first quarter of this year has receded and in most opinions been eliminated for the near future. We expect financial conditions to remain relatively healthy.
While we expect the Federal Reserve to announce another .25% Fed Funds rate increase in December, any increases in interest rates that directly touch our accounts are likely to remain modest and well below long term norms for quite some time.
The Yield Curve which measures the difference between very short term interest rates right out to the current rate on thirty year Treasury bonds is positive. That means when current interest rates are plotted out with dots along a line marking the various maturity points the line slopes upward in a gentle “curve.” When we see this curve upward, a positive Yield Curve, it is generally accepted that the economy is still expanding, with no sign of recession, and that is good news for our investments.
Payrolls are growing and unemployment still hovers at around 5%. Throughout my career of thirty years unemployment at 5% has meant just about everyone who wants a job has a job. This does not mean that many people would like better jobs, but that is a different conversation entirely. Average hourly earnings have increased +2.4% year over year (Tower Square Research), and this is further evidence that more employed workers will have more money and this in turn should fuel a growth in consumer spending and economic growth.
We have expected a certain amount of volatility in both stock and bond markets in this quarter that is mostly related to the election and the resulting economic uncertainty. I say mostly because we cannot discount the fact that earnings reports are just starting and many analysts expect them to under-perform too high expectations. This often causes the “missing” stocks to fall in value, at least temporarily.
So, we expect a bit of turbulence, but we remain cautiously optimistic going into 2017. Our International exposure should be a bit of a tailwind once again rather than the drag on portfolio performance we saw in 2015 and earlier this year. The US Dollar has stabilized, and even strong inflows to the relative higher interest rate of our Treasuries should not disturb that stability.
For more detailed looks at how economic and international events effect our investment outlook and eventual decisions please join us for our quarterly “Listen at Lunch” calls held just after the close of each quarter. Our next call will be on Friday (they are always on Fridays), January 6, 2017 at 12:00 Noon. Grab your lunch and follow along with our slide presentation showing graphs that help to illustrate the data and opinions we are forming. Look for our email reminders of the call that will give you instructions on how to find the slide presentation on our website. Not on line? Call Lindsay and she will make sure you get hard copy of the slides we are looking at.
Remembering that wealth management isn’t just about managing portfolio performance, our next Lunch and Learn events will be on “ Social Security Claiming Strategies.” Even if you are already well into your claiming years, reflect on whether you could have made a better decision with better information. Consider joining us with a friend who could use this type of information, and please remember to reserve your seats for both you and your guests as seating is limited.
Wishing you a rewarding and successful completion to this tumultuous year,
Linda P. Erickson, CFP®