Regardless of whether investors are rejoicing or mourning after the November election, one fact that can’t be disputed is that a dramatic shift in sentiment has taken place. Both consumers and businesses are reporting their highest confidence numbers in over a decade. The climate has suddenly changed, the Dow surged over 9% in the first 60 days, at one point nearly hitting 20,000. But what is even more telling are the consistent and historically high consumer and business confidence numbers. For example, the U.S. Consumer Confidence Index surged in December to its highest level in more than 15 years.
In addition, the National Federation of Independent Businesses (NFIB) survey of business optimism recently came in at a 10-year high. Sales of new and existing homes both recently posted their best numbers since 2007, and this in the face of mortgage rates that went up in December, normally not a positive development for home sales. This level of confidence has not been seen for a decade or more. It is a clear shift in sentiment. Value stocks posted one of their best quarters in 10 years. The average total return for diversified U.S.-stock fund in 2016 was 10.8%, which is very close to the 100-year average for U.S. stocks. It was a solid year, thanks to the 4th quarter.
We wisely counseled our clients to stay invested last quarter, even though sentiment was largely negative after a long nasty campaign season. Fears about the election and what would happen to the country, the economy and the markets if the wrong person got elected, had even the optimists in a cautionary “wait and see” mode, while the pessimists and fear mongers were predicting a market collapse and global selloff if Trump were to somehow win the election. A Clinton victory was widely predicted by the press and the polls.
Wrong and Wrong. It solidifies what we have reiterated time and time again, that you simply can’t believe or invest around what you hear on TV, read in the newspaper or see on the internet. They can be very misleading and inaccurate. The media and the polls got it wrong regarding Britain leaving the E.U. and the U.S. election. We are proud of the fact that in this newsletter last quarter, we advised our clients to stay put and we predicted higher stock prices would surface once the election uncertainty was removed, no matter who won. It was good advice.
Even the Fed rate hike in December failed to derail the market’s determination to go higher. We predicted Dow 20,000 right here in this newsletter back in July of 2014, when the Dow was at 16,921 and we said that it could be achieved by 2018. We should have been more optimistic!
Common questions: Has the market come too far too fast? Is the increase justified by the fundamentals? Is it too late to invest new money? What about the prospects for bonds now that the Fed seems to be poised to raise interest rates 2 or 3 more times in 2017?
Let’s take them one by one. Consumer and business sentiment has shifted to decidedly positive since the election. The new administration has consistently said it will pursue a pro-growth, pro-business, pro-jobs agenda by lowering taxes, reducing burdensome regulations and allowing corporations to bring back hundreds of billions of dollars that has been stranded overseas by an archaic and prohibitive 40% repatriation tax. Doing away with this tax would allow a massive amount of cash to flow back into the U.S. and could provide a huge amount of capital to drive the economy forward. So no, the market has not come too far too fast.
The market has simply adjusted to the new prospects for growth that did not exist 90 days ago. Since the stock market is a barometer of future corporate earnings and economic activity (6-9 months out), based on the positive sentiment change, the fundamentals such as increased sales, earnings, employment, consumer and business spending, may soon justify today’s prices. Is it too late to invest new money? We are in the equivalent of a basketball game’s opening tipoff. This administration has 4 years to prove what it can do, and we are only days into the first year.
As we have said many times over the past 8 years, the Obama recovery was one of the slowest and most anemic recoveries of the past 50 years. Some called it the jobless recovery, and there was very little wage growth combined with huge increases in healthcare and housing costs, so often times, it didn’t feel much like a recovery. However, this is exactly why we think there is still room for a much longer and stronger recovery, not unlike the 17-year bull market that began 2 years after Reagan took office in 1982. There are of course, no guarantees, but this is not a market we recommend betting against.
There appears to be much pent up desire on the part of businesses to begin expanding plants, hiring people and buying equipment again. For much of the past 8 years, corporations have been reluctant to invest, due to a lack of confidence. They were buying other companies, buying back their own stock and returning money to shareholders in the form of dividends, instead. If this shift in sentiment has staying power, improved business and consumer spending could have a significant impact on corporate profits. And in the end, that is the reason we invest, it is the hope that the undervalued companies we own today will become significantly more valuable in the future as profits improve.
Bonds? They ended the year up 2.6% as measured by the Barclays Aggregate Bond Index, but they were down 3% in the 4th quarter as the Fed raised interest rates. With more potential rate hikes expected in 2017, we see bonds as a necessary diversification tool for some investors, but their prospects look uninspiring as interest rates appear to be trending higher.
In this environment, owning the right types of bonds is extremely critical. We expect 2017 to be a very interesting year, and we welcome the change in sentiment.
2017 Financial To Dos
- Review the family budget and income spending priorities
- Estimate your charitable and family giving goals for this year
- For charitable giving consider giving shares in low basis investments instead of cash
- Create a sound Social Security benefits strategy that maximizes your expected benefit
- Review and increase contributions to your 401(k), IRAs and other retirement accounts
- Review beneficiary information
- Rollover retirement accounts at previous employers
- Analyze whether starting or converting to a Roth IRA makes sense (and cents)
- Update the estate plan, medical directives and insurance cover-age
- Replenish the emergency fund and rainy day fund
- Interest rates may be on the rise, now may be a good time to refinance a mortgage
A 2015 study indicated families that have a financial plan and periodically review and revise the plan with their trusted advisors are three times more likely to achieve their long-term financial goals than those with no plan. Your team at IMS Capital is ready to guide you on these matters and many more.
Thank you for investing alongside us as we continue building wealth wisely, providing high quality portfolio management and in-vestment counsel to you, our valued clients.