Happy New Year!
As this bizarre investment year comes to a close, disciplined equity investors are kicked back enjoying their well-deserved double-digit returns. This is quite the change from the investing environment of early 2016, when fears about China, US rate hikes, and steadily plummeting oil prices caused the S&P 500 to fall 9% in the first six weeks of trading.
…but I bet you didn’t even remember that did you? And look at us now, flirting with all-time high Dow 20,000 price levels. Time and discipline are an investor’s best friend, but 2017 promises its own set of risks and opportunities.
If you’ve not caught the news, Donald Trump will soon become the 45th President of the United States. His surprise victory comes with the promise of tax cuts (here’s a very good summary from our friends at Nerd’s Eye View), fewer government regulations, and massive infrastructure spending; which in theory, should add to short-term growth. Markets have so far responded with surging stock prices; but higher interest rates, a stronger dollar, and proposed trade barriers could very well offset some of these potential positives going forward.
President-elect Trump wants to both lower taxes and increase government spending, which by definition will greatly increase the deficit: A proposition house republicans have historically opposed, and may not be fully on board with. Deficit spending by the US government is not necessarily bad and despite what you may believe, is not the same as deficit spending by households. Why? Because the US government can print its own money, and has been aggressively doing so through monetary policy stimulus over the past decade. These policies ultimately come at the price of inflation; but the unique combination of global currency weakness and low commodity prices have so far allowed the Fed to continue interest rate accommodation without the threat of inflation.
At its December policy meeting, the Fed, under the leadership of Janet Yellen, increased the target policy rate by an additional 25 bps to 0.75%. Still exceptionally low compared to historic levels, but the committee has also communicated their plans for three additional rate hikes in 2017, as conditions warrant. What will be interesting to watch is how growth and inflation will be affected by simultaneous fiscal stimulus and monetary tightening.
Since July, the yield on the U.S. 10-year Treasury bond has increased roughly 100 basis points from its record low. Many investors saw losses in their bond investments for the first time in years during the month of November as prices fell and rates rose. Remember, that while it can be frustrating to see losses in traditionally “safe” investments, it also means fixed income investors will finally be able to reinvest in higher yielding securities with less risk, a privilege yet to be afforded to the Baby Boomer retirement generation.
Bottom Line: Going into 2017, we continue to be overweight equities compared to bonds, but will continue to look for opportunities in the fixed income markets as rising rates provide for positive real rates of return. We are also cautiously underweight global banks and yield substitutes such as: REITs, high dividend paying stocks, and MLPs which are likely to underperform as investors slowly pour back into the safety of bonds at higher yields. Changes to estate and income tax policy are high on both our and the new administration’s radar, and while we expect other issues such as healthcare and immigration reform to come first, it’s still likely we will see changes soon. We will continue to share news pertaining to changes in tax policy via social media and will reach out personally if we believe changes need to be made to your investment objectives.
Lastly, this January marks the second anniversary of Radix Financial, a milestone that doesn’t seem possible. On a personal level, it’s been a busy year and 2017 looks to be no different. Thank you for your continued faith and trust, and as always, never hesitate to contact me with any questions or concerns you may have.
Amy Hubble, CFA, CFP®
*A quick compliance note: Each year, Registered Investment Advisers must provide an updated Form ADV Part 2 disclosure brochure to all our clients and prospects. For your convenience please visit https://adviserinfo.sec.gov/IAPD/Part2Brochures.aspx?ORG_PK=171159 to read the updated brochure for Radix Financial.