MIDYEAR OUTLOOK 2018
Oh my, it is hot enough out there for ya! I hope you all are staying cool and having a wonderful summer.
Taking a look mid-year, we wanted to share our thoughts on what’s going on in the world, how it affects your planning/investments, and what we are doing about it.
What’s going on in the World?
If it is not obvious to you, the world continues to rotate around the movements, tweets, and actions of President Donald Trump; it is hard to find two sentences that do not include his name. His promised aggressive agendas on Immigration, Law and Order, Health Care, Taxes, Trade and Tariffs, Regulation Reductions, Energy Development, and now, a new Supreme Court opening, conflict with NATO allies, funding and Co-operation with Russia; it’s dizzying! Alliances seem to be straining for most, with the exception of Israel; I am hopeful that President Trump is achieving some successes and that they won’t come at too great a cost. He is certainly making many uncomfortable, but let’s choose to remain optimistic! It appears that nuclear conflict with North Korea has decreased, which is promising; however, the increasing potential impact of trade wars are worrying the markets and helping to keep equity returns muted, which is not so great.
The US Equity Market performance, YTD as of June 30th, is up about 2.65%, and is currently valued at about 16 times earnings, which is in line with historical norms. The current valuations, low interest and low inflation environment should position companies with growing revenue and profits to perform very well going forward. Last quarter, we saw the revenue of the S&P 500 companies grow over 7%, which generated a resounding 24% profit…WOW! We are very anxious to see if that profit growth was a one-off due to tax reform, or if it was the beginning of something larger and more sustainable. We will be able to tell more as this quarter’s profits begin reporting. We are anticipating an 14-16% profit growth, which will be very powerful for continuing Equity Market appreciation.
On the Fixed Income side, the Federal Reserve is continuing its slow and steady increases of the federal funds lending rate. This will continue to put pressure on bonds, especially those in the highest (best) rated and most interest sensitive categories. We also expect to begin seeing the Federal Reserve reduce its +$4 trillion portfolio of bonds sooner rather than later, which will reduce money currently circulating in our economy and needs to be watched carefully. Inflation is not yet affecting the economy; however, if history repeats itself, with unemployment rates at historical lows, wage pressure and inflation will be shortly behind. As of June 30th, YTD the Barclay US Aggregate Bond Index performance is down about (2%).
How does this affect your planning and investments?
The tax cuts have been very favorable, giving those non-professional businesses an automatic 20% reduction. The lowering of the corporate tax rates to 21% greatly impacts the larger companies’ net profits; deregulation and deficit spending by the government should continue to support higher corporate profits and valuations. Ultimately, even if equity valuations remain muted, the higher corporate profits will emerge into higher stock valuations, despite the trade/tariff wars, which will in turn, be an added tax on consumers. Additionally, the cuts have lowered most taxes for individuals and substantially decreased the complexity of planning for those with estates valued under $11.5MM for singles, and $23MM for marrieds. Our lives have become much simpler in relation to estate planning and distribution.
What we are doing about it!
We believe the Equity Markets have room to run, hopefully up to and above our beginning of the year forecast of 8-10%. Therefore, we continue to stay fully invested in our equity allocations. Due to under-performance, we have replaced one of our Large Cap positions. We have also increased our Global Fund allocation, generally staying substantially more invested in the US domestic markets over the international markets.
Even though the year-to-date Fixed Income Aggregate returns are in negative territory, about 2% down, the returns on the credit risk bonds, primarily High Yield Corporates and Senior Floating Bank Loans, continue to have positive returns in the 2-3% range, from which our accounts have benefited. We continue to hold most of our Fixed Income allocations in credit risk bonds, and have also added High Yield Tax-Free Bonds to our Non-Retirement accounts.