The Brave Report- Market Commentary for January 2017

View the PDF version of this report here:  The Brave Report- January 2017

The inauguration is over and Donald Trump is now officially our president.  This marks the beginning of a major shift in political and economic ideology within our executive branch. The next few months will hopefully give us a more detailed understanding of what the new administration’s priorities are and what campaign promises may actually come to fruition. As with previous administrations, I expect the policies that eventually get passed to be much more watered down versions of what was initially promised on the campaign trail. With that said, it’s not just policy that drives markets.  We have seen over the past few months that Trump is not one to keep his mouth shut, even over the slightest criticism.  It will be interesting to see how investors and markets digest and react to the constant stream of tweets and statements coming from the President.

I do not give too much credit to a president for market performance. I think the president can lay the groundwork for economic growth and create an environment where businesses can thrive. However, it is very difficult to tie market performance to specific policy changes. There are too many other outside variables that impact the markets. There is also a delay in the impact of policy on financial performance so determining a president’s real impact on the markets is difficult to quantify. With that said, I think it is interesting to point out that during Obama’s term as president we saw the second best market performance of any term in history.  Over his eight years in office, the market grew more than 16% on an annualized basis. This trailed only the Bill Clinton years. Regardless of your political leanings, if you were a disciplined investor over the last 8 years you are in a much better financial position today than you were when Obama took office.

Market Overview

The last month reminds me a lot of this past summer and early fall when uncertainty ruled the markets and they traded in a very tight range while we all searched for answers.  The last month actually represents the narrowest monthly trading range the Dow has seen in over 60 years, only fluctuating within a 1.4% range.[i] The next narrowest month being 1.85%. Even further, there hasn’t been a 1% decline in the S&P500 since October 11th marking the longest such streak since this bull market started.[ii] I am not surprised by this consolidation as we are still trying to hash out the facts and fictions of the new administration. I spoke to this in last month’s report that after such a euphoric post-election run up a pause or slight pullback would be normal. Traders and investors are wary of being on the wrong side of the next move in either direction so are content just waiting things out until more certainty exists.  As with last year, when this directionality does take shape we could see a sharp move in one direction as this tension is released.

The fixed income markets have also seen a bit of a stabilization. After reaching a high of 2.62% in December, the yield on the 10-year treasury dropped back to 2.38% before bouncing back to just shy of 2.50%.  Part of this pull back was simply due to a little bit of overshooting during the fast run up in November and December. Additionally, after the initial election euphoria, the increased uncertainty around the new administration over the last month has also caused a little bit of a return to safety.  This can also be seen in the rise in gold over the same time period.

The hope is that following the inauguration we will start to see a little bit more clarity around all the issues that the new administration has proposed.  We will slowly get a picture of what Trump’s real priorities are and through the various confirmation hearings that are ongoing, get a full picture of what the new administration will look like.

Protectionism: Some of the loudest rhetoric coming from Trump in recent weeks has been his threats of import taxes and tariffs. One of Trumps biggest campaign promises was to bring industrial jobs back to the US. His first tactic along this route has been to threaten companies and countries that are making capital investments outside of the US with large import taxes. While long-term trade agreements, taxes and tariffs need the approval of congress and usually take years to materialize, the president does have the power to impose up to a 15% tariff for 150 days without congressional support.[iii]  So far all we have seen is talk, but this talk is being taken seriously by some of our largest trade partners and multi-national corporations. These large capital projects take years for companies to complete so until we have more certainty about the future of trade policies it is difficult for these companies to develop and implement their long-term growth strategies.  So while there could be a short-term bump in domestic industrial jobs, I fear this tactic could slow longer term growth.

Earnings: Earnings season has kicked off and while the limited reports we have seen so far seem to be positive the more interesting story I am looking for will be how companies are factoring in the potential policy shifts of the new administration.  Are company projections changing? Are there any adjustments in capital expenditure? How are companies factoring in potential changes in corporate tax rates?  Policy changes won’t have had an impact on earnings yet but companies must plan for the future and make decisions based on what they feel are the Presidents real priorities.  Company forecasts and comments on their conference calls will be very telling as we try to understand what businesses think of the new administration.

Strategy Commentary

The consolidation we have seen over the past month has caused us to reevaluate some of our positions.  While we are not making any widespread changes now, we are proceeding with a little more caution.  As I discussed last month, the market has been on a good run since the election and the pause over the last month is a healthy reaction following this run-up. It would not surprise me to see a small pullback or a continuation of this consolidation while we wait for some of the uncertainty to be lifted.  If a pullback does materialize, I will look at it as a buying opportunity and add to some positions.

I continue to maintain a bias toward the US but have begun to evaluate some selective developed international exposure, specifically Germany.  From a strict valuation standpoint, there are some definite opportunities throughout Europe. However, the political overhang still gives me pause. Germany is the most stable of these European economies, which reduces some of that political risk. I am not adding this position yet but it is on my radar.

I am maintaining my overweights to financials, industrials, technology and small cap US.  Financials have been the big winner since the election and the early bank earnings releases only strengthen their case. Small cap value has also fared quite well since the election and over the last year has been up close to 43%. Even with this great performance over the last year I still think it is the optimal place to be if the market makes a move higher.

While we have seen a stabilization in the fixed income markets, I am still negative on the space as a whole.  The positions I do maintain are low duration to mitigate the impact of the potential rise in interest rates. Additionally, my cash positions have increased as a replacement for some of my fixed income allocations.

[i] http://www.cnbc.com/2017/01/18/narrowest-dow-range.html

[ii] https://www.bespokepremium.com/think-big-blog/64-trading-days-without-a-1-decline/

[iii] http://www.cnbc.com/2017/01/16/trump-threatens-german-carmakers-with-35-percent-us-import-tariff.html


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Simple Steps to Improve Your Finances in the New Year

A lot of people talk about the New Year as a chance to start over, a chance to create new habits or improve something in their lives. People make resolutions to change.  They will work out more. They will eat healthier. They will drink less. They will save more money. All of these are great aspirations but unfortunately they are rarely kept. US News estimates that 80% of New Year’s resolutions fail by February. There are many reasons given as to why this happens but I think it boils down to a few basic ones: time, motivation (or lack there of) and accountability. How you overcome these obstacles is going to vary depending on the goal you are trying to achieve. Being a financial blog it’s probably most fitting that I focus on that aspect of your resolutions.  So what simple steps can you take to improve your finances in 2017 and make sure these improvements stick?

  • Systematize your savings: This is the simplest way to improve your finances without having to do too much work. Any bank or brokerage firm can set up automated savings. Set it up to pull from your checking account on the same day that your paycheck is deposited. That way the money is never there for you to spend.  Your spending habits should adapt to the new “take home” amount. This systematization can also be accomplished within your 401k. To make this even more effective you can gradually increase the savings amount throughout the year. By increasing the savings amount by a small amount every month, or every quarter, you won’t feel the pain of the increase but by the end of the year you will be saving an amount you never thought possible.
  • Educated yourself: Read a book, listen to a financial podcast, stay up to date with what’s going on in the markets or attend a seminar. Improving your financial acumen will motivate you to do more. As I’ve discussed before a lack of knowledge can make us fearful of making poor financial decisions and lead to us neglecting our finances.  The only way to overcome this is to educate yourself.
  • Set aside specific time: This is probably the most important, but also the most difficult to do. Improving other aspect of your life requires a certain time commitment.  In order to be healthier, you have to work out more, etc.  The same holds true for your finances.  You must set aside specific time to review and adjust your financial plan or investments. Too often I see people create an investment portfolio or set up a savings plan and then think they are done. As with most other things in life, improving your finances requires more than the initial groundwork.  It requires follow-up and review.
  • Articulate your goals: The resolution of improving your finances or saving more is great but it doesn’t address the why behind it. In order to motivate change there needs to be a why behind that resolution.  Why do you want to save more? Why do you want to improve your finances?  Articulating these whys helps to create an additional motivation behind the resolutions.  You are not just motivating yourself to save.  You are motivating yourself to retire early or buy that house.  These emotional connections to your resolutions help to improve motivation and make you more accountable because not achieving them has greater consequences.
  • Hire professional help: Now, I understand that this last one could be self-serving but if you don’t think you can do some or all of the things above then it may be easier for you to simply outsource this part of your life. You understand your own limitations of time and knowledge but if improving your finances is important than let someone (or something) else do it for you.  This could be as simple as using a robo-advisor to set up a basic savings and investment plan or hiring an advisor to put together a full financial plan that they hold you accountable to.  In either case, some sort of outside counsel can provide you with needed improvement in your finances you are looking for without the time commitment.

Improving your finances isn’t rocket science. These simple changes can be accomplished by almost anyone and can be applied at all levels of wealth and income. If you are already taking the above steps, then taking your finances and investment to the next level will have to be the topic of another post but by accomplishing these simple “starter” steps it will allow you to look back on the year and not be in the 80% majority.