What a month November turned out to be. I watched in disbelief as the numbers piled up. The momentum seemed to flow back and forth as tension mounted. Excitement, anxiety and perhaps agony seemed to reach all time levels as the clock struck midnight. On the edge of my couch, I debated whether my heart could sustain anymore as I watched in complete disbelief. And then it was finalized.
After waiting 108 years, the Chicago Cubs finally won the World Series! What a historical moment it was for baseball. Growing up in St. Louis, my allegiance lies strong as a Cardinal. But even with my rivalry disdain for the Cubs, the moment was bigger than a team. The moment transcended rivalry and engulfed a sport and city. As a huge fan of the game it caused me to shed a few tears for what sports and baseball can mean to so many people. It was an amazing night.
Of course, you may have thought I was talking about another major November event…the election! Well, I would much prefer to talk baseball than politics but it seems this election perhaps more than any other of recent past needs some added attention. Similar to the emotions of the World Series, the excitement, agony, anticipation, anxiety will slowly wear off. Eventually we will be left sorting through the actual details of the new administration and carefully analyzing how decisions may affect us as long-term investors. Since the election, we have seen the general stock market as measured by the Wilshire 5000 rally 7.30% from 11-6 to 12-6 while the bond market has declined -2.58% over the same period in anticipation of a Fed hike in December. Year to date we remain very pleased with results and ahead of our client planning targets for 2016.
Moving forward we are focused on areas of new value, risk and shifts from the new administration. As long-term investors we aim to learn as much about the new policies as details get released, then we slowly analyze how this may affect the value of our investments and shift to areas of new value if warranted. We fully expect areas of the market to react in funny ways during the short run as it processes speculation. We aim to use over reactions to purchase at lower levels or excessive optimism to sell some holdings at higher prices. We have already been busy making trades which can be fully reviewed in our transaction blog.
Thus far, the market has reacted in a somewhat rational way. Speculation around the reduction in corporate and individual tax rates will improve consumers ability to spend (which makes up roughly 70% of our economy). Reducing regulations generally allows businesses to have a little more profitability. However, the new administration is also focused on some massive infrastructure projects that, if implemented, will cost serious money.
In the short run this may spur the economy some, but will also add to the debt level and offset economic gains in other areas. The nation’s debt-to-GDP ratio is at its highest level since WWII. As rates climb, the amount spent on the debt will increase. Perhaps this is offset by added productivity and tax revenues, but remains to be seen.
These variables will ebb and flow as always with the details of the actual policies often being the devil or saint. The potential for larger inflation continues to increase as policy direction unfolds. Inflation is not all bad, as mentioned in last months article, assuming we see economic growth outpace the inflation rate. But if the policies are executed incorrectly, one scenario may be large inflation without economic growth. For the historians reading this, simply reflect back to the late 60’s and through the 70’s for experiential evidence of what can happen with inflation.
Another interesting historical period defined by lower taxes and reduced regulations was the mid 1980’s and the Plaza Accord. In 1985 the Plaza Accord was formed when major currency countries agreed to generate a dollar decline after a large increase in the dollar’s value in the early 1980s, after Ronald Reagan cut tax rates and reduced regulation. The Plaza Accord lowered the value of the dollar, led to increased market volatility and eventually caused the Fed to ratchet up interest rates higher than it otherwise would have. The higher rates then pressured the economy.
We do not think excessive inflation or rate hikes are likely and remain optimistic that the lower taxes will help the economy and companies short term, but we must pay attention to the mid & longer term risk if the policies are not well executed. While some policies may have immediate affects, we believe the business cycle will continue to run its course. Recessions are a normal and healthy part of economic activity. As rates climb it becomes increasingly likely we see a shallow recession in coming years. Timing this is nearly impossible, but we know a good financial plan can weather any storms, align for your comfort level and ultimately meet long-term goals. This year looks to be closing out on a fantastic note for the markets, investors and the economy. Enjoy your egg nog, families and the Christmas season.
We are honored to have been stewards for your financial journey in 2017!
Evergreen Wealth Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.
Index results do not reflect management fees and expenses and you cannot typically invest in an index.