Hope everyone is having a great summer…. down south it is either blistering hot, soaking wet or steamy. For those fortunate thinkers that rotate between New Orleans, New Zealand and Utah…or those that escape from Balmy southern Mississippi to the refreshing Lakes of Minnesota…. all we have to say to that is…. Damn Good Planning!
Following-up on our theme at the beginning of 2017…. We are sharing 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?
Well, we thought the election of Donald Trump would impact the relationships with World leaders and the US economy…little did we know that the world would seem to be rotating around whatever he did, whatever he is doing and whatever he is going to do! It is hard to get through this barrage of information. His aggressive agenda seems to be stalled on anything legislatively that requires some consensus. His agenda regarding the reversal of prior administrative Executive Orders is and has moved very quickly.
The deceptive appearance of lessoning of risk in the Middle East seems to be substantially offset by the intensification of North Korea tensions. The economic expansion has developed and synchronized around the globe, with the participation of nearly every major world economy. The responses are extensive, including improving labor markets, accommodative monetary policy, supportive financial conditions, favorable sentiment, and the potential for fiscal impulses. Taken together, these inputs suggest the global expansion should persist.
The US Equity markets are fully valued at about 19 times earnings, in a low interest…low inflation environment we feel this is sustainable, even though the historical norms are 16 times earnings. Things have been so calm in the US Equity markets that the average daily swing in the S&P 500 index, in the second quarter, was about 0.3 percentage points—the lowest in more than 50 years.
On the Fixed Income side…the Federal Reserve last month hiked its federal funds rates for a second time this year, raising it to the 1%-to-1¼% range. The central bank also plans to start reducing its $4 trillion-plus portfolio of bonds later this year. Fed Chair Yellen said the decision “reflects the progress the economy has made and is expected to make.” The Fed also issued its economic forecasts last month, and lowered its inflation prediction for the year from the 1.9% it expected in March to 1.6%. “We continue to feel that with a strong labor market and a labor market that’s continuing to strengthen, the conditions are in place for inflation to move up,” Yellen said.
How does this affect your planning and investments ?
We have positioned Investments and Planning based on current information and tax structures.. We are comfortable with where we are now, even if the markets have a normal correction, which is due. The Equity market valuations are ahead of themselves by about 12-18 months of earnings, but with Revenue growth and Earnings finally increasing….the prospects for enhanced earnings look promising. Also, I believe, as the market valuations indicate, that either Corporate taxes will go down, Personal taxes will decrease, Infrastructure spending will get approved or all will see some improvements. Each and all of these will add favorable stimulus to Market Earnings…YIPEE!
What are we doing about it ?
Equities….even with the current stronger valuations, we are mostly invested in the US. Emerging and international look compelling, but with the stronger push for US protection of jobs, in the short run we remain primarily invested in the US. Additionally we have been increasing our allocation of equities into the Small cap stocks and large cap…beginning to exclude the mid-cap space. The advantage large cap stocks have is the heavy Tech component and overseas profits that may be able to come back to the US more favorably. The small cap stocks have about half as much exposure to international sales and should benefit from any level of trade protectionism.
Fixed Income….we continue to overweight the credit risk bond vs those more sensitive to interest rate adjustments. These have typically performed better in an improving economy and rising rate environment. These include senior floating rate bonds, high-yield corporates and some emerging market and Investment-grade bonds.
Our 2017 Forecast
Equity Forecast: We felt at the beginning of the year that equity returns would be in the 8-10% range. Year-to-Date 6/30/2017, the S&P 500, including dividends, is at 9.34%...we feel the Equity markets have 2%-4% more gain potential this year, assuming there are positive movements forward for some of the items on the legislative agenda.
Fixed Income: We feel we can see another 2%-3% this year, equaling what we have already seen year-to-date of 2.27%, Barclays total return bond index.
Hope you have a great Summer and second half of the year. Hope to see you soon.
Please let us know if there is anything we need to know or if there is anything you need from us. That is why we are here.
Randy Spinosa CFP®, CPA, ChFC