Posts tagged ‘Politics’

March Madness or Retirement Sadness?

bball

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (March 1, 2017). Subscribe on the right side of the page for the complete text.

“March Madness” begins in a few weeks with a start of the 68-team NCAA college basketball tournament, but there has also been plenty of other economic and political madness going on in the background. As it relates to the stock market, the Dow Jones Industrial Average index reached a new, all-time record high last month, exceeding the psychologically prominent level of 20,000 (closing the month at 20,812). For the month, the Dow rose an impressive +4.8%, and since November’s presidential election it catapulted an even more remarkable +13.5%.

Despite our 45th president just completing his first State of the Union address to the nation, American voters remain sharply divided across political lines, and that bias is not likely to change any time soon. Fortunately, as I’ve written on numerous occasions (see Politics & Your Money), politics have no long-term impact on your finances and retirement. Sure, in the short-run, legislative policies can create winners and losers across particular companies and industries, but history is firmly on your side if you consider the positive track record of stocks over the last couple of centuries. As the chart below demonstrates, over the last 150 years or so, stock performance is roughly the same across parties (up +11% annually), whether you identify with a red elephant or a blue donkey.

dem-v-rep

Nevertheless, political rants flooding our Facebook news feeds can confuse investors and scare people into inaction. Pervasive fake news stories regarding the supposed policy benefits and shortcomings of immigration, tax reform, terrorism, entitlements, foreign policy, and economic issues often result in heightened misperception and anxiety.

More important than reading Facebook political rants, watching March Madness basketball, or drinking green beer on St. Patrick’s Day, is saving money for retirement. While some of these diversions can be temporarily satisfying and entertaining, lost in the daily shuffle is the retirement epidemic quietly lurking in the background. Managing money makes people nervous even though it is an essential part of life. Retirement planning is critical because a mountain of the 76 million Baby Boomers born between 1946 – 1964 have already reached retirement age and are not ready (see chart below).

eld-pop-growth

The critical problem is most Americans are ill-prepared financially for retirement, and many of them run the risk of outliving their savings. A recent study conducted by the Economic Policy Institute (EPI) shows that nearly half of families have no retirement account savings at all. The findings go on to highlight that the median U.S. family only has $5,000 in savings (see also Getting to Your Number). Even after considering my tight-fisted habits, that kind of money wouldn’t be enough cash for me to survive on.

Saving and investing have never been more important. It doesn’t take a genius to understand that government entitlements like Social Security and Medicare are at risk for millions of Americans. While I am definitely not sounding the alarm for current retirees who have secure benefits, there are millions of others whose retirement benefits are in jeopardy.

Missing the 20,000 Point Boat? Dow 100,000

Making matters worse, saving and investing has never been more challenging. If you thought handling all of life’s responsibilities was tough enough already, try the impossible task of interpreting the avalanche of instantaneous political and economic headlines pouring over our electronic devices at lighting speed.

Knee-jerk reactions to headlines might give investors a false sense of security, but the near-impossibility of consistently timing the stock market has not stopped people from attempting to do so. For example, recently I have been bombarded with the same question, “Wade, don’t you think the stock market is overpriced now that we have eclipsed 20,000?” The short answer is “no,” given the current factors (see Don’t Be a Fool). Thankfully, I’m not alone in this response. Warren Buffett, the wealthiest billionaire investor on the planet, answered the same question this week after investing $20,000,000,000 more in stocks post the election:

“People talk about 20,000 being high. Well, I remember when it hit 200 and that was supposedly high….You know, you’re going to see a Dow [in your lifetime] that certainly approaches 100,000 and that doesn’t require any miracles, that just requires the American system continuing to function pretty much as it has.”

Like a deer in headlights, many Americans have been scared into complacency. To their detriment, many savers have sat silently on the sidelines earning near-0% returns on their savings, while the stock market has reached new all-time record highs. While Dow 20,000 might be new news for some, the reality is new all-time record highs have repeatedly been achieved in 2013, 2014, 2015, 2016, and now 2017 (see chart below).

record-highs

While I am not advocating for all people to throw their entire savings into stocks, it is vitally important for individuals to construct diversified portfolios across a wide range of asset classes, subject to each person’s unique objectives, constraints, risk tolerance, and time horizon. The risk of outliving your savings is real, so if you need assistance, seek out an experienced professional. March Madness may be here, but don’t get distracted. Make investing a priority, so your daily madness doesn’t turn into retirement sadness.

investment-questions-border

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

www.Sidoxia.com

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in FB and certain exchange traded funds (ETFs), but at the time of publishing had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

March 4, 2017 at 11:04 am Leave a comment

Stocks: Be My Long-Term Valentine

hearts-1254000

With Valentine’s Day just around the corner, stock bulls remain in love as the major indexes once again hit another new, all-time record high this week (Dow 20,269). Unfortunately, however, there are many other investors afraid of going through another 2008-2009-like break-up, so they remain single as they watch from the sidelines. In a recent post, I point out, as repeated record highs continue to be broken, the skeptics remain fearful of divorcing their cash. While it is indeed true that since the end of the 2016 presidential election, some investors are beginning to date stocks again, there are still wide swaths of conflicted observers very afraid of potential rejection.

As I’ve documented on numerous occasions, the skepticism is evident in the depressing long-term trends found in the weekly fund flows data and the disheartening record-low stock ownership statistics.

Long-Term Relationships

For some, casually dating can be fun and exciting. The same principle applies to short-term traders and speculators. In the short-run, the freedom to make free-wheeling, non-committal stock purchases can be exhilarating. Unfortunately, the fiscal and emotional costs of short-term dating/trading often outweigh the fleeting benefits.

How can you avoid the relationship blues? In short…focus on the long-term. Like any relationship, investing takes work, and there will always be highs, lows, and bumps in the road. It is better to think in terms of a marathon, rather than a sprint. The important lesson is to maintain a systematic, disciplined approach that you can apply irrespective of the changing investment environment. In other words, that means not loosely reacting (buying or selling) to presidential tweets of the day.

Famed investor Peter Lynch spoke about long-term stock fund investing in this manner

“If you invest in mutual funds and make mutual funds investment changes in less than 10 years…you’re really just ‘dating.’ Investing in mutual funds should be marital – for richer, for poorer, and so on; mutual fund decisions should be entered into soberly and advisedly and for the truly long term.”

 

No relationship survives without experiencing wild swings, and stocks are no exception. Establishing deep roots to your investments via intensive fundamental analysis provides stability, especially if you are managing your portfolio personally. Even if you are outsourcing your investment management to an advisor like Sidoxia Capital Management, it is still important to understand your advisor’s investment process and philosophy. That way, when the economic and political winds are blowing fiercely, you won’t overreact emotionally and see your gains fly away.

Investing legend Warren Buffett has discussed the importance of intensive research on long-term investment performance through his “20-Hole Punch Card” rule:

“I could improve your ultimate financial welfare by giving you a ticket with only twenty slots in it so that you had twenty punches – representing all the investments that you got to make in a lifetime. And once you’d punched through the card, you couldn’t make any more investments at all. Under those rules, you’d really think carefully about what you did, and you’d be forced to load up on what you’d really thought about. So you’d do so much better.”

 

Patience is a Virtue

In the instant gratification society we live in, patience is difficult to come by, and for many people ignoring the constant chatter of fear is challenging. Pundits spend every waking hour trying to explain each blip in the market, but in the short-run, prices often move up or down regardless of the daily headlines.

Explaining this randomness, Peter Lynch said the following:

“Often, there is no correlation between the success of a company’s operations and the success of its stock over a few months or even a few years. In the long term, there is a 100% correlation between the success of a company and the success of its stock. It pays to be patient, and to own successful companies.”

 

Long-term investing, like long-term relationships, is not a new concept. Investment time horizons have been shortening for decades, so talking about the long-term is generally considered heresy. Rather than casually dating your investments, perhaps you should commit to a long-term relationship and divorce your bad short-term centric habits. Now that sounds like a sweet Valentine’s Day kiss your investment portfolio would enjoy.

investment-questions-border

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

www.Sidoxia.com

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in AAPL, T, FB and certain exchange traded funds (ETFs), but at the time of publishing had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

February 11, 2017 at 10:42 pm Leave a comment

Super Bowl Blitz – Dow 20,000

team

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (February 3, 2017). Subscribe on the right side of the page for the complete text.

If you have been following the sports headlines, then you know the Super Bowl 51 NFL football championship game between the four-time champion New England Patriots and the zero-time champion Atlanta Falcons is upon us. It’s that time of the year when more than 100 million people will congregate in front of big screen TVs across our nation and stare at ludicrous commercials (costing $5 million each); watch a semi-entertaining halftime show; and gorge on thousands of calories until stomachs bloat painfully.

The other headlines blasting across the media airwaves relate to the new all-time record milestone of 20,000 achieved by the Dow Jones Industrials Average (a.k.a., “The Dow”). For those people who are not glued to CNBC business television all day, the Dow is a basket of 30 large company stocks subjectively selected by the editors of the Wall Street Journal with the intent of creating an index that can mimic the overall economy. A lot of dynamics in our economy have transformed over the Dow’s 132 year history (1885), so it should come as no surprise that the index’s stock components have changed 51 times since 1896 – the most recent change occurred in March 2015 when Apple Inc. (AAPL) was added to the Dow and AT&T Inc. (T) was dropped.

20,000 Big Deal?

The last time the Dow closed above 10,000 was on March 29, 1999, so it has taken almost 18 years to double to 20,000. Is the Dow reaching the 20,000 landmark level a big deal in the whole scheme of things? The short answer is “No”. It is true the Dow can act as a fairly good barometer of the economy over longer periods of time. Over the 1998 – 2017 timeframe, economic activity has almost doubled to about $18 trillion (as measured by Gross Domestic Product – GDP) with the added help of a declining interest rate tailwind.

In the short-run, stock indexes like the Dow have a spottier record in correlating with economic variables. At the root of short-term stock price distortions are human behavioral biases and emotions, such as fear and greed. Investor panic and euphoria ultimately have a way of causing wild stock price overreactions, which in turn leads to poor decisions and results. We saw this firsthand during the inflation and subsequent bursting of the 2000 technology bubble. If that volatility wasn’t painful enough, last decade’s housing collapse, which resulted in the 2008-2009 financial crisis, is a constant reminder of how extreme emotions can lead to poor decision-making. For professionals, short-term volatility and overreactions provide lucrative opportunities, but casual investors and novices left to their own devices generally destroy wealth.

As I have discussed on my Investing Caffeine blog on numerous occasions, the march towards 20,000 occurred in the middle of arguably the most hated bull market in a generation or two (see The Most Hated Bull Market). It wasn’t until recently that the media began fixating on this arbitrary new all-time record high of 20,000. My frustration with the coverage is that the impressive phenomenon of this multi-year bull market advance has been largely ignored, in favor of gloom and doom, which sells more advertising – Madison Avenue execs enthusiastically say, “Thank you.” While the media hypes these stock records as new, this phenomenon is actually old news. In fact, stocks have been hitting new highs over the last five years (see chart below).

dji-07-17

More specifically, the Dow has hit consecutive, new all-time record highs in each year since 2013. This ignored bull market (see Gallup survey) may not be good for the investment industry, but it can be good for shrewd long-term investors, who react patiently and opportunistically.

Political Football

In Washington, there’s a different game currently going on, and it’s a game of political football. With a hotly contentious 2016 election still fresh in the minds of many voters, a subset of unsatisfied Americans are closely scrutinizing every move of the new administration. Love him or hate him, it is difficult for observers to accuse President Trump of sitting on his hands. In the first 11 days of his presidential term alone, Trump has been very active in enacting almost 20 Executive Orders and Memoranda (see the definitional difference here), as he tries to make supporters whole with his many previous campaign trail promises. The persistently increasing number of policies is rising by the day (…and tweet), and here’s a summarizing list of Trump’s executive actions so far:

  • Refugee Travel Ban
  • Keystone & Dakota Pipelines
  • Border Wall
  • Deportations/Sanctuary Cities
  • Manufacturing Regulation Relief
  • American Steel
  • Environmental Reviews
  • Affordable Care Act Requirements
  • Border Wall
  • Exit TPP Trade Deal
  • Federal Hiring Freeze
  • Federal Abortion Freeze
  • Regulation Freeze
  • Military Review
  • ISIS Fight Plan
  • Reorganization of Security Councils
  • Lobbyist Bans
  • Deregulation for Small Businesses

President Trump has thrown another political football bomb with his recent nomination of Judge Neil Gorsuch (age 49) to the Supreme Court in the hopes that no penalty flags will be thrown by the opposition. Gorsuch, the youngest nominee in 25 years, is a conservative federal appeals judge from Colorado who is looking to fill the seat left open by last year’s death of Justice Antonin Scalia at the age 79.

Politics – Schmolitics

When it comes to the stock market and the economy, many people like to make the president the hero or the scapegoat. Like a quarterback on the football field, the president certainly has influence in shaping the political and economic game plan, but he is not the only player. There is an infinite number of other factors that can (and do) contribute to our country’s success (or lack thereof).

Those economic game-changing factors include, but are not limited to: Congress, the Federal Reserve, Supreme Court, consumer sentiment, trade policy, demographics, regulations, tax policy, business confidence, interest rates, technology proliferation, inflation, capital investment, geopolitics, terrorism, environmental disruptions, immigration, rate of productivity, fiscal policy, foreign relations, sanctions, entitlements, debt levels, bank lending, mergers and acquisitions, labor rules, IPOs (Initial Public Offerings), stock buybacks, foreign exchange rates, local/state/national elections, and many, many, many other factors.

Regardless to which political team you affiliate, if you periodically flip through your social media stream (e.g., Facebook), or turn on the nightly news, you too have likely suffered some sort of political fatigue injury. As Winston Churchill famously stated, “Democracy is the worst form of government except for all the other forms that have been tried from time to time.”

When it comes to your finances, getting excited over Dow 20,000 or despondent over politics is not a useful or efficient strategy. Rather than becoming emotionally volatile, you will be better off by focusing on building (or executing) your long-term investment plan. Not much can be accomplished by yelling at a political charged Facebook rant or screaming at your TV during a football game, so why not calmly concentrate on ways to control your future (financial or otherwise). Actions, not fear, get results. Therefore, if this Super Bowl Sunday you’re not ready to review your asset allocation, budget your annual expenses, or contemplate your investment time horizon, then at least take control of your future by managing some nacho cheese dip and handling plenty of fried chicken.

investment-questions-border

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

www.Sidoxia.com

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in AAPL, T, FB and certain exchange traded funds (ETFs), but at the time of publishing had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

February 4, 2017 at 8:02 am Leave a comment

Wiping Your Financial Slate Clean

slate

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (January 3, 2017). Subscribe on the right side of the page for the complete text.

The page on the calendar has turned, and we now have a new year, and will shortly have a new president, and new economic policies. Although there is nothing magical about starting a fresh, new year, the annual rites of passage also allow investors to start with a clean slate again and reflect on their personal financial situation. Before you reach a desired destination (i.e., retirement), it is always helpful to know where you have been and where are you currently. Achieving this goal requires filtering through a never-ending avalanche of real-time data flooding through our cell phones, computers, TVs, radios, and Facebook accounts. This may seem like a daunting challenge, but that’s where I come in!

Distinguishing the signals from the noise is tough and there was plenty of noise in 2016 – just like there is every year. Before the S&P 500 stock index registered a +9.5% return in 2016, fears of a China slowdown blanketed headlines last January (the S&P 500 fell -15% from its highs and small cap stocks dropped -26%), and the Brexit (British exit) referendum caused a brief 48-hour -6% hiccup in June. Oil was also in the news as prices hit a low of $26 a barrel early in the year, before more than doubling by year-end to $54 per barrel (still well below the high exceeding $100 in 2014). On the interest rate front, 10-Year Treasury rates bottomed at 1.34% in July, while trillions of dollars in global bonds were incomprehensibly paying negative interest rates. However, fears of inflation rocked bond prices lower (prices move inversely to yields) and pushed bond yields up to 2.45% today. Along these lines, the Federal Reserve has turned the tide on its near-0% interest rate policy as evidenced by its second rate hike in December.

Despite the abbreviated volatility caused by the aforementioned factors, it was the U.S. elections and surprise victory of President-elect Donald Trump that dominated the media airwaves for most of 2016, and is likely to continue as we enter 2017. In hindsight, the amazing Twitter-led, Trump triumph was confirmation of the sweeping global populism trend that has also replaced establishment leaders in the U.K., France, and Italy. There are many explanations for the pervasive rise in populism, but meager global economic growth, globalization, and automation via technology are all contributing factors.

The Trump Bump

Even though Trump has yet to accept the oath of Commander-in-Chief, recent investor optimism has been fueled by expectations of a Republican president passing numerous pro-growth policies and legislation through a Republican majority-controlled Congress. Here are some of the expected changes:

  • Corporate/individual tax cuts and reform
  • Healthcare reform (i.e., Obamacare)
  • Proposed $1 trillion in infrastructure spending
  • Repatriation tax holiday for multinational corporate profits
  • Regulatory relief (e.g., Dodd-Frank banking and EPA environmental reform)

The chart below summarizes the major events of 2016, including the year-end “Trump Bump”:

16-sp-sum

While I too remain optimistic, I understand there is no free lunch as it relates to financial markets (see also Half Trump Full). While tax cuts, infrastructure spending, and regulatory relief should positively contribute to economic growth, these benefits will have to be weighed against the likely costs of higher inflation, debt, and deficits.

Over the 25+ years I have been investing, the nature of the stock market and economy hasn’t changed. The emotions of fear and greed rule the day just as much today as they did a century ago. What has changed today is the pace, quality, and sheer volume of news. In the end, my experience has taught me that 99% of what you read, see or hear at the office is irrelevant as it relates to your retirement and investments. What ultimately drives asset prices higher or lower are the four key factors of corporate profits, interest rates, valuations, and sentiment (contrarian indicator) . As you can see from the chart below, corporate profits are at record levels and forecast to accelerate in 2017 (up +11.9%). In addition, valuations remain very reasonable, given how low interest rates are (albeit less low), and skeptical investor sentiment augurs well in the short-run.

16-eps

Source: FactSet

Regardless of your economic or political views, this year is bound to have plenty of ups and downs, as is always the case. With a clean slate and fresh turn to the calendar, now is a perfect time to organize your finances and position yourself for a better retirement and 2017.

investment-questions-border

www.Sidoxia.com 

Wade W. Slome, CFA, CFP®

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in FB and certain exchange traded funds (ETFs), but at the time of publishing had no direct position in TWTR or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

January 3, 2017 at 12:17 pm Leave a comment

Betting Before the Race Starts

Horse Race 2

The spectators, myself included, are accumulating economic and political information as fast as it’s coming in and placing bets on different horses. Since Election Day, wagers on stocks have pushed the Dow Jones Industrial Average higher by more than 1,400 points (+7.8%) to almost 20,000. The current favorites have names like the banking sector, infrastructure, small caps, commodities, and other cyclical industries like the transports. The only problem…is the race has not even started.

Rather than place all your wagers before the race, when it comes to the stock market, you can still place your bets after the race begins (i.e., the presidency begins). So far, many bets have been made based on rhetoric emanating from the presidential election. Nobody has ever accused President-elect Trump of being short on words, and ever since the campaign process started a few years ago, his gift of the gab has led to many provocative claims and campaign promises. But as we have already learned, actions speak much louder than promises.

The walls of Trump’s pledges are already beginning to collapse, whether you interpret the shifts in his positions as softened stances or pure reversals. Examples of his position adjustments include recent comments regarding the maintenance of Obamacare’s preexisting conditions and universal care access components; immigration policies for illegal immigrants and his protective wall; or promises to lock up Hillary Clinton over her email scandal. The main point is that words are only words, and campaign promises often do not come to fruition.

The President-elect’s definitely has a full plate before his January 20th Inauguration Day, especially if you consider he is responsible for naming his White House and the heads of 100 federal agencies before his swearing in. But this only scratches the surface. When all is said and done, Trump will be making roughly 4,100 appointments, with 1,000 of those needing Senate confirmation.

While we sit here only one month after Trump won the presidential election, he has not sat on his hands. Trump has already made a significant number of his Cabinet announcements (click here for a current tally), with the much anticipated Secretary of State announcement expected to officially come next week.

From an investment standpoint, it makes perfect sense to make some adjustments to your portfolio based on the president-elect’s economic platform and political appointments. However, any shifts to your portfolio should be measured. For example, Hillary’s tweet heard around the world regarding skyrocketing pharmaceutical prices had a significant negative impact on the pharmaceutical/biotech sectors for many months. Expectations were for a more lenient and pharma-supportive administration to take place under Trump until excerpts from his Time magazine interview leaked out, “I’m going to bring down drug prices. I don’t like what has happened with drug prices.” Subsequent to his comments, the sector swiftly came crashing down.

As I have also pointed out previously, although Trump and the Republican Party have control of Congress (House & Senate), the make-up of the Republican majority is limited and quite diverse. I need not remind you that many of Trump’s Republican colleagues either campaigned against him or remained silent through the election process. What’s more, many fiscally conservative Tea Party members are not fully on board with a massive infrastructure bill, coupled with significant tax cuts, which could explode our already elevated deficits and debt loads.

Suffice it to say, there remains a lot of uncertainty ahead, so before you risk making wholesale changes to your portfolio, why not wait for the President-elect’s actions to take shape rather than overreact to fangless rhetoric. In other words, you can save money if you wait for the race to begin before placing all your bets.

investment-questions-border

Wade W. Slome, CFA, CFP®

www.Sidoxia.com

Plan. Invest. Prosper.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing had no direct position in  any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

December 11, 2016 at 4:15 pm Leave a comment

Half Trump Empty, or Half Trump Full?

glass

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (December 1, 2016). Subscribe on the right side of the page for the complete text.

It was a bitter U.S. presidential election, but fortunately, the nastiest election mudslinging has come to an end…at least until the next political contest. Unfortunately, like most elections, even after the president-elect has been selected, almost half the country remains divided and the challenges facing the president-elect have not disappeared.

While some non-Trump voters have looked at the glass as half empty, since the national elections, the stock market glass has been overflowing to new record highs. Similar to the unforeseen British Brexit outcome in which virtually all pollsters and pundits got the results wrong, U.S. experts and investors also initially took a brief half-glass full view of the populist victory of Donald Trump. More specifically, for a few hours on Election Day, stock values tied to the Dow Jones Industrial Average index collapsed by approximately -5%.

It didn’t take long for stock prices to quickly reverse course, and when all was said and done, the Dow Jones Industrial Average finished the month higher by almost +1,000 points (+5.4%) to finish at 19,124 – a new all-time record high (see chart below). Worth noting, stocks have registered a very respectable +10% return during 2016, and the year still isn’t over.

dji-2016

Source: Investors.com (IBD)

Drinking the Trump Egg Nog

Why are investors so cheery? The proof will be in the pudding, but current optimism is stemming from a fairly broad list of anticipated pro-growth policies.

At the heart of the reform is the largest expected tax reform since Ronald Reagan’s landmark legislation three decades ago. Not only is Trump proposing stimulative tax cuts for corporations, but also individual tax reductions targeted at low-to-middle income taxpayers. Other facets of the tax plan include simplification of the tax code; removal of tax loopholes; and repatriation of foreign cash parked abroad. Combined, these measures are designed to increase profits, wages, investment spending, productivity, and jobs.

On the regulatory front, the President-elect has promised to repeal the Obamacare healthcare system and also overhaul the Dodd-Frank financial legislation. These initiatives, along with talk of dialing back other regulatory burdensome laws and agencies have many onlookers hopeful such policies could aid economic growth.

Fueling further optimism is the prospect of a trillion dollar infrastructure spending program created to fix our crumbling roads and bridges, while simultaneously increasing jobs.

No Free Lunch

As is the case with any economic plan, there is never a free lunch. Every cost has a benefit, and every benefit has a cost. The cost of the 2008-2009 Financial crisis is reflected in the sluggish economic growth seen in the weak GDP (Gross Domestic Product) statistics, which have averaged a modest +1.6% growth rate over the last year. Scott Grannis points out how the slowest recovery since World War II has resulted in a $3 trillion economic gap (see chart below).

us-real-gdp

Source: Calafia Beach Pundit

The silver lining benefit to weak growth has been tame inflation and the lowest interest rate levels experienced in a generation. Notwithstanding the recent rate rise, this low rate phenomenon has spurred borrowing, and improved housing affordability. The sub-par inflation trends have also better preserved the spending power of American consumers on fixed incomes.

If executed properly, the benefits of pro-growth policies are obvious. Lower taxes should mean more money in the pockets of individuals and businesses to spend and invest on the economy. This in turn should create more jobs and growth. Regulatory reform and infrastructure spending should have similarly positive effects. However, there are some potential downside costs to the benefits of faster growth, including the following:

  • Higher interest rates
  • Rising inflation
  • Stronger dollar
  • Greater amount of debt
  • Larger deficits (see chart below)

trumpdeficit

Source: The Wall Street Journal

Even though President-elect Trump has not even stepped foot into the Oval Office yet, signs are already emerging that we could face some or all of the previously mentioned headwinds. For example, just since the election, the yield on 10-Year Treasury Notes have spiked +0.5% to 2.37%, and 30-Year Fixed Rate mortgages are flirting with 4.0%. Social and economic issues relating to immigration legislation and Supreme Court nominations are likely to raise additional uncertainties in the coming months and years.

Attempting to anticipate and forecast pending changes makes perfect sense, but before you turn your whole investment portfolio upside down, it’s important to realize that actions speak louder than words. Even though Republicans have control over the three branches of government (Executive, Legislative, Judicial), the amount of control is narrow (i.e., the Senate), and the nature of control is splintered. In other words, Trump will still have to institute the “art of the deal” to persuade all factions of the Republicans (including establishment, Tea-Party, and rural) and Democrats to follow along and pass his pro-growth policies.

Although I do not agree with all of Trump’s policies, including his rhetoric on trade (see Free Trade Boogeyman), I will continue paying closer attention to his current actions rather than his past words. Until proven otherwise, I will keep on my rose colored glasses and remain optimistic that the Trump glass is half full, not half empty.

investment-questions-border

Wade W. Slome, CFA, CFP®

www.Sidoxia.com

Plan. Invest. Prosper.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing had no direct position in  any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

December 3, 2016 at 8:00 am Leave a comment

Trump: Bark Worse Than the Bite?

 

Jack Russell Terrier Snarling

Unless you have been living in a cave this week, you are probably aware the country has elected a new president. Leading up to Election Day, the anxiety was palpable. A populist wave, much like the one experienced in the British Brexit vote earlier this year, resulted in economically disenfranchised voters coming out in full force to vote out the perceived establishment candidate, Hillary Clinton. Financial market pundits and media commentators predicted an immediate 11-13% decline in stock values if Donald Trump were to win. Could they have been more wrong? After a brief -5% decline in pre-trading Dow Jones Industrial Average future prices, the Dow subsequently skyrocketed more than 1,000 points higher to finish up +1.4% for the day (see chart below). For the week, the Dow amazingly rallied by +5.4%.

Source: Investing.com

Source: Investing.com

As I have written on numerous occasions, politics have very little impact on the long-term direction of the financial markets. Yes, it is true that regulations and policies implemented by the president and Congress can influence specific industries or individual companies over the short-run. Hillary Clinton proved this assertion with her pharmaceutical industry tweet, which created a lasting hangover effect on the sector. But guess what? Regulations and politics have always changed throughout our country’s history, with various shifting policies impacting businesses asymmetrically – some positively and some negatively. The good news…in an ever-expanding global economy, accelerated through technology, capitalism forces businesses to adapt to political change.

Considering the amount of our nation’s political variation, what has been our country’s stock market and economic track record over the last 100 years under 17 different presidents (8 Democrats and 9 Republicans)? See chart below:

Source: Macrotrends

Source: Macrotrends

Not too shabby judging by the roughly 188x–fold increase in the Dow Jones Industrial Average (or > ~18,700%+ return) to a fresh all-time record high this week. While I am admittedly nervous about a full, Republican tri-power Trump administration (President/House/Senate), the reality is that Trump’s unconventional, unprecedented platform doesn’t fit squarely into the traditional Republican policy boxes. In fact, he has switched his party affiliation five times. President-elect Trump will therefore need to reach across the political aisle to Democrats, and work with Speaker of the House Paul Ryan to accomplish the platform agenda priorities he outlined during his presidential campaign.

While all this political election discussion has been stimulating and exhausting, fortunately, followers of my Investing Caffeine  blog understand there are much more important factors than politics affecting the performance of the stock market and economy – namely corporate profits, interest rates, valuations, and sentiment (see Don’t Be a Fool, Follow the Stool).

As mentioned, the market’s returns are influenced by four key factors, but sentiment and stock market values are largely shaped by investor behavior. Trump has less control on investor behavior, but his policies can directly impact corporate profits and interest rates – two critical components of economic health. Part of the reason Trump won the election was due to campaign promises regarding many popular stimulative policies, including personal and corporate tax cuts; infrastructure spending; repatriation of foreign money; tax simplification and reform; Obamacare improvement; and immigration reform.

As it turns out, a good number of the issues relating to these policies happen to be bipartisan in nature. Given the Republican-controlled Congress, investors are perceiving these potential policy changes as positive for the market – at least for the first week of his presidential tenure.

For now, President-elect Trump has struck the proper conciliatory tone and made appropriate comments. In the coming days and weeks, investors are watching closely for tangible evidence and clues of his policy priorities, as he fills key political posts on his presidential team. Time will tell whether the early honeymoon will continue past Trump’s inauguration day, but currently, the consensus is his bark heard during Trump’s heated 18-month presidential campaign is worse than the actual bite of his election victory.

investment-questions-border

Wade W. Slome, CFA, CFP®

www.Sidoxia.com

Plan. Invest. Prosper.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing had no direct position in  any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page

November 12, 2016 at 1:41 pm Leave a comment

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