Politics: a bit of levity and a sense of balance to such a wild political season.
“Politics is the art of looking for trouble, finding it everywhere, diagnosing it incorrectly, and applying the wrong remedies” Groucho Marx-the comedian.
What election outcome would be the most calming to the markets? A Clinton presidential victory and a Republican Congress would give markets a sigh of relief. This alignment would assure that no extreme anti-economic policy would get through Congress. Clinton would have to pivot to the center, and adopt pro-economic policies, or face a one term Presidency. Any other scenario may generate market anxiety with a short term market sell-off.
The U.S. economy is growing at a stubbornly stagnant 2.0% rate. Although labor conditions show signs of tightening; job gains have been skewed to lower paying jobs; and higher paying/skilled jobs are not being filled. Regulation, immigration, tax, and education policies all have a hand in this situation. If our government finally and urgently addresses these policy imperatives, I believe the entrepreneurial “animal spirits’ will release and our economy will begin to grow more briskly, generating higher incomes, corporate profits and tax revenue.
Stock and Bond Markets
The past two years have been a very frustrating period for investors as the U.S. stock market has been essentially flat. The culprit is a decline in corporate earnings due primarily to the strong dollar relative to other currencies and the decline of oil prices. Oil prices have rebounded to $50/barrel from the low $20s in early 2016; and the dollar has stabilized since early 2015 after a significant rise. These trends should remain favorable for corporate earnings to grow in 2017, barring any unforeseen economic concern or crisis. Corporate earnings are expected to grow by 14% and 11% in 2017 and 2018, respectively, which should be the catalyst for a 6-10% rise in the stock market in the next year to 18 months. With a 10-Year Treasury bond yield of 1.8%, the trend is likely to be with higher rates, not lower. I continue to recommend to not own long maturity bonds as these bonds’ prices are the most vulnerable to rising interest rates.
Investment Portfolio Design
Depending upon client objectives, we have been increasing investments in small to mid-sized companies, which have greater exposure to the US economy. Additionally we are allocating money to funds (long/short funds) designed to mitigate markets’ downside risk while participating in their upside potential. While we are not predicting a market correction or bear market, they are normal periods of market cycles. Therefore, I believe prudence prevails when investors are positioned and prepared ahead of these occurrences, based on their particular risk tolerances and goals. Cash is always king; we advise clients to always have sufficient cash and short term bonds for peace-of-mind and cash needs for 1-3 years, depending upon your situation.
If you need help with investment portfolio design, financial planning, or investment management advice on a fee-only basis, contact me Richard Lawrence at Lawrence Wealth Management LLC, a small, private investment firm. Phone 215-540-0896; email firstname.lastname@example.org.