Newsletter: 1st Quarter 2017
FIRST QUARTER 2017 NEWSLETTER
Recently we attended a conference featuring James Bowen, CEO of First Trust Advisors, and Brian Wesbury, Chief Economist, discussing the firm’s outlook for the markets and giving an economic update. There was a heavy rain that day, one of several in a row. Bad weather delayed the flight of one of the speakers, but didn’t dampen their enthusiasm for an optimistic view of the next few years. Given all the concerns we hear and read about, one might be surprised, but consider 2016, a year full of the unexpected. In 2016, the Dow Jones Industrial Average posted the worst 2 week start in its history. Markets were dealing with fallout from the first Fed Rate hike since Dec. 2015, concern about China’s economy, violent outbreaks in the Middle-East, and speculation about BREXIT. By mid-April the market had mounted a rally. Then came the BREXIT vote in early summer, and the nominations of two presidential candidates facing strong divisions in their own parties. The Election in November brought perhaps the biggest surprise of all. And the market climbed, finishing the year strongly, and continuing an upward path through the first quarter of 2017.
The conference highlighted several strengths in the U.S. Economy: unemployment numbers falling; domestic oil production climbing; the U.S. is believed to have the highest amount of Technically Recoverable Shale Gas/Oil of any nation; U.S. Manufacturing has been rising steadily since 2008; technological advances, including drones, robotics, and 3D printing are reshaping the business world.
Mr. Wesbury noted that the Fed grew excess reserves considerably through years of Quantitative Easing (QE 1,2 and 3), but just held onto them. So, there was no hyperinflation. Companies have lowered production costs, largely through technical advances, and improved balance sheets. Debt to asset ratios in Banks and Financials have been decreasing for the past 3 years.
Much we heard at the conference reinforced our feeling that the long-term bull market is still in place and has more room to run. Over the short term, many of the things we all worry about, and some things not even on our radar screens, could cause significant sell offs. We would see those as opportunities to place more of our cash reserves.
On the bond front, we’re beginning to see some good values in 8-10-year investment grade municipals. Some analysts have noted that Trump’s tax plan calls for the elimination of AMT; those bonds which are subject to AMT generally have higher yields than non-AMT bonds. Should the tax bill pass Congress with the AMT elimination intact, AMT bonds would likely pop up in value. Corporations may also benefit from tax law changes; and improving balance sheets could lead to rating upgrades. Intermediate corporate bonds in the lower end of investment grade appear to offer good value.
Today it is raining again-another surprise. The forecast was for sun and temps in the 70s. Still the birds, the flowers beginning to bloom in the yard, and those hardy souls who have already gotten their motorcycles and convertibles on the road, know that summer is on its way. We look forward to seeing and hearing from you in the months ahead. This is a good time of year to touch base, revisit goals, and discuss any changes in your financial forecast.
Thank you for the opportunity to work with you,
The Galarneau Group