When I was younger, in a time long ago and a place far, far away Carly Simon sang about Anticipation – “We can never know about the days to come but we think about them anyway, and I wonder if I’m really with you now or just chasing after some finer day.”
Anticipation is always where the action is; we get to imagine and then cherry pick the best part of the future ideal for our own interests. I believe the Trump Bump is the result of selective anticipation of the new administration’s potential delivery of three big positives for the economy and by extension the financial markets.
The economy heading into the election was on a firm footing, growing at 1.5% to 2.0%, unemployment was at a decades’ low point, and interest rates were low and stable. When the Trump win ushered in the possibility of adding to that better than good base the promises of tax reduction, less costly regulation and compliance, and massive infrastructure spending to further stimulate the economy, well, the equity markets reacted with rapid and surprising strength.
Since the inauguration the anticipation of a rapid delivery on pro-business policies and tax reform seems to have moved into a wait and see mode as the both stock and bond markets trade in a narrow range. Equity markets here in the US are fairly valued if the businesses expand their top line growth and simultaneously decrease their tax and other expenses. If not, if earnings do not increase, we could see a push into “over-valued” territory which then, in my opinion, is a market looking for a reason to correct. Mohammed El-Erian summarized where we are, and where we might be going, eloquently in a Bloomberg View posting on February 1st.
“Specifically, the implementation of a well-designed set of policies built around the president’s three headline initiatives – tax reform, deregulation and infrastructure – would unleash reflationary forces that would validate existing asset valuation, and could take them a lot higher if the rest of the world were also to improve its policy mix. If, however, the US stumbled into protectionism and trade wars, the markets would give up more of the recent gains, and possibly even overshoot on the way down.”
We believe this year will be volatile, and it will be our challenge to take advantage of the volatility within our commitment to long term wealth management. In early January we moved some of our bond positions into a type of bond that usually benefits from rising interest rates, which we anticipate. Further, we took the opportunity capture some gains in equity and are now holding a bit more cash than normal. We anticipate that our next quarterly assessment of our various strategies will again incorporate raising cash that will be available for the inevitable pullback. When might that pullback occur? No way to know, but we acknowledge a heightened level of uncertainty both politically and economically. I was a Girl Scout, so you know what I’m doing.
To be more informed about the specifics of our thoughts on the economy, investment theses for the quarter, and a recap of what happened in the prior quarter, join our quarterly conference call, Listen at Lunch, always scheduled for Noon on a Friday. Our next call is on Friday, April 7, 2017 at Noon. Look for an email announcement or call Lindsay at 336-274-9403 to get the call in number and passcode as well as directions on how to see the slides and graphs (for those of you who love them) accessed on our website.
Wealth Management is not just about management of money; it is also about management of life decisions, and preparation for both the expected and unexpected events that we all experience. To assist you in thinking about one of the main topics we routinely address with clients – Estate Planning – we will go back to basics, Estate Preparation 101 with a new add-on we call Financial Hospice. At our next Lunch and Learn Jennifer Noble of Connors Morgan will walk us through what documents a prepared family should have in place and what these documents should contain. I will speak for a few minutes on a “last days checklist” that, used with loving care, can reassure the family that they are prepared to honor their loved one’s wishes and they have taken care of details that many times are left unsaid and undone until it’s too late. Look for announcements regarding our Lunch and Learn events, also in April, in both Greensboro and Durham.
I have to finish these thoughts with an old Chinese curse, yes curse, - “May you live in interesting times.”
Linda P. Erickson, CFP®
The views stated in this letter are not necessarily the opinion of Cetera Advisor Networks LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.