2nd Quarter 2017 Newsletter
The "Lazy, Hazy, Crazy Days of Summer" are upon us. Can you hear the voice of Nat King Cole on the radio? If you don't know what we are talking about, ask Siri or Alexa to play it for you. The last several weeks have featured a lack of direction in the equity market, Fed, and Congress. One market analyst recently talked of the "muddled" picture from Washington and Wall Street. On a lazy, hazy day, if you are muddling herbs from your garden, "muddled" seems an apt description of the current investment climate. Just as summer temperatures have tended to stay in a narrow range, so have equities and fixed income, with a slow movement higher over the last few weeks. It has been some time since we have gone this long without a major correction; and history teaches us that markets do not keep going up indefinitely without one. For now, the markets have no clear direction, with no especially good or bad news to motivate action.
Congress prepares for their summer break having managed to make little progress on either party's agenda. And the Fed, having planned for additional, if modest, raises in short term rates through the rest of 2017, is becoming more cautious about the rate of inflation slowing. Low global inflation data and a slowing of our domestic inflation in June was thought to be a temporary condition, but the continued trend in July has many economists and the Fed wondering if there is a systemic cause. Unemployment has continued to fall and economists now say we are at or near statistical full employment. Labor shortages in construction are causing businesses to turn down available work. In the transportation industry, a shortage of experienced truckers, and the impact of retirements in an aging labor pool threaten to dampen consumer spending, a major driver of economic growth. The Fed seems likely to sit and watch for the haze to lift before taking further steps. With the prospect of additional increases in short term rates this year more uncertain, investment grade corporate and municipal bonds continue to perform well. An article on Yahoo Finance last week discusses growing risk in the markets, saying, "during a stretch that has seen markets sleepily power to new highs," risky behavior could lead to a major correction (Miles Udland, July 27). Will the crazy days come with the heat of August? If and when they arrive, we will be prepared to deal with both the increased risk and the opportunities which eventually follow.
We will be keeping an eye on realized gains in our taxable managed account models as we head to fall. Paying taxes on realized gains is not pleasant; and we realize that a higher than expected gain can affect your budget. For those receiving social security, the income from realized gains is used in the calculation to determine what is taxable. In addition, your tax professional might suggest you increase your estimated tax payments if the higher level of income could be the norm. Sometimes we have a position which did unusually well, but shows increased risk of significant pull back. Being committed to a risk-managed investment strategy, we may find it prudent to sell so that we protect our hard-won gains. We may want to raise cash and hold it for a more productive environment in which to reinvest. Such was the case in 2016 with some of our models. YTD 2017 gains are running at a modest level, as they did for several years prior to 2016. A period of volatility could make it necessary to sell some highly appreciated positions. If that should occur, we will reach out to discuss details and possible tax strategies you may want to discuss with your tax advisor before year-end.
We hope you are finding opportunities to enjoy family and friends this summer. Music and summer are a great match. We are pleased to be co-sponsors of the Portland Chamber Music Festival again this year. The festival begins on August 10. Information is available at www.pcmf.org. Call us if you are interested in attending one of their events; complimentary or discounted tickets may be available. Thank you for your confidence in us and if you have any concerns, please don't hesitate to let us know.
The Galarneau Group