A Midyear Update
July 23, 2018
Where are we, and where are we going?
As the pace of news continues to increase, it’s easy to get distracted from the opportunities and pitfalls before us. To help keep focus on your long-term financial plan, our team has developed and refined an investment process, independent of forecasts, predictions or market timing.
Our process is based on a customized asset allocation based on your current needs and long-term vision. Still, it is important, to get a sense of where we are and where we are going with regard to financial markets, the political landscape and the economy.
The Markets: We Predict a Correction
We believe a correction is likely in the equity markets. Our challenge is we do not know when, Tomorrow or three years from now, it’s impossible to predict. We view this as natural part of economic cycles. We do not believe in market timing or adjusting your portfolio in anticipation of a correction.
We also believe interest rates will continue to rise and short to mid duration bonds could be a diversification strategy to help diversify your stock positions.
Politics: November Will Be Key
It will be interesting to see the outcome of the mid-term elections. As we get closer to the mid-terms on November 6th, we will no doubt hear from both sides about all our countries problems, as candidates try justifying their bid for election.
Elections will be held for all 435 seats in the House of Representatives for its two year terms. Also, 35 seats are up for grabs in the Senate, for its six-year positions.
“Politics is not worrying this country one-tenth as much as where to find a parking space.” – Will Rogers
The Economy: It’s All Good!
Economic indicators are some of the best we have seen in years.
The unemployment rate is the lowest since 1969, while inflation, as measured by the consumer price index, or CPI, remains low. The gross domestic product (GDP) is a measure of the market value of all goods and services produced in a year. GDP growth continues to accelerate and, in our opinion, will increase further because of tax and regulatory cuts. DOW earnings per share jumped by more than 8 percent in 2017 and are expected to continue to grow in 2018. We are seeing record foreign investment in the United States. We expect U.S. companies to continue repatriating monies previously held in overseas banks. This should act as an additional stimulus for our economy.
Global companies cashed in on newfound economic strength in Europe and Latin America as well as relative stability in China. For the first time in years, virtually all major global economies are growing this year.
Companies continue accumulating record levels of cash, which be deployed as higher dividends, employee bonuses, capital investments or stock buybacks. all of which help the broader markets and economy grow. Non-financial U.S. companies are sitting on an estimated $1.9 trillion in cash, more than double their 2008 totals, according to Moody’s. Corporate earnings increased 24 percent in the first half of 2018 versus 2017.
Two Areas of Concern: Debt and Trade Wars
Two areas of concern continue to be highlighted by the media and doomsdayers are the federal debt and the possibility of an escalating trade war due to tariffs.
We have heard the federal debt is growing to unsustainable levels and destroying the U.S. economy for more than 30 years. While the absolute dollar amount of the debt continues to rise, the impact remains benign. Back in 1981, the public debt of the federal government was $1 trillion; today it’s more than $21 trillion. At some point, the theory goes, additional debt is going to be the fiscal straw breaking the camel’s back. The problem with this theory is, in spite of record-high debt, interest on the debt was only 1.4 percent of GDP last year, hovering near the lowest levels in the past 50 years.
We believe our economy (GDP) will grow 3 to 4 percent, with the boost from tax and regulatory cuts. Even if interest rates double on the debt, we would be well within historic norms. Doubling the interest rate to 4 percent would mean interest relative to GDP would double as well, going from 1.4 percent to 2.8 percent. That certainly wouldn’t be pleasant, but it would be no different than the average net interest on the national debt from 1981 through 1999.
We also are hearing more concerns about a trade war due to the threat of tariffs by the United States. No doubt this refrain will continue. We believe tariffs are simply a negotiating tactic for fair currency valuation and respect for intellectual property. Ongoing tariffs can cause continued short-term volatility but should have minimal long-term impact.
“No nation was ever ruined by trade.” – Benjamin Franklin
Position Yourself from Inflation with Increased Income
We are not saying everything will be perfect. There is often a difference between good economics and social impact. We believe higher inflation and a drop in fixed income values will impact many who are not invested properly. Those who react to short-term market corrections and/or have too much fixed income may not benefit, despite the strong markets we expect. We will continue to hear more about technology replacing jobs and problems due to either a stronger or weaker U.S. dollar.
We have seen a decades-long trend of low inflation, and we might be at a point where this reverses. The 40-year trend of falling inflation was primarily generated by healthy global demographics, globalization, automation and central bank policy. Falling inflation translated directly to lower bond yields and provided fuel to rising equity and credit markets.
As inflation rises, the cost of everything, from food to utilities, increases. To preserve your standard of living, your income should rise commensurately. Depending on each individual's situation, we believe it is important portfolios should be positioned to generate growing income rather than fixed income. In this regard, we believe fixed-income investments such as CDs and long-term bonds might pose significant risk to people’s ability to maintain their lifestyles as costs of goods and services increases.
This is why we monitor and update your portfolio –we will recommend adjustments to help meet your changing personal needs.
As Always, We Are Focused on Your Current Needs and Future Vision
Our entire team continues to focus on helping provide you with the income you need (or will in the future) to do what you want today while working to grow your portfolio to maintain and enhance your lifestyle in the future. We monitor and update your personal and customized portfolio allocation based on your needs and on changing tax laws. We focus on net returns after fees, expenses and taxes, and we take a very proactive approach. It is important to have realistic expectations with regard to both income and return. We are here to help you craft a long-term plan to assist in meeting your current goals and your long-term needs and vision.
Never has the pace of change, or volume of news, been this great, nor will it ever be this slow again. Our experienced team is here for you, whatever the future brings. In between our conversations with you, we are monitoring both your portfolio and events that might impact you. Our team is committed to continuing education so we can provide you with cutting-edge salutations. We use highly qualified people who have both the training and experience to help you develop your purpose plan.
We meet with thought leaders personally so we can understand what might impact you, without going through the filter of the media or other third parties. Other companies use cookie-cutter solutions for portfolios and rely on third-party information and research. Some companies are even using technology to replace staff and reduce personal contact with their clients. We believe you should have a fully customized experience, so we continue to grow our team and use technology to provide a more personal experience, not less.
We appreciate being your partner and look forward to continuing to serve you. Please contact us whenever we can be of service to you, your family and friends. We are taking clients only by referral but are happy to meet, without cost or obligation, with someone you feel would benefit from our personal Purpose Planning Process. We are here for you. Please contact us without cost or obligation to discuss your personal goals, to provide a second opinion on current financial and wealth planning or if we can otherwise be of service.
The material is general in nature. The information has been obtained from sources considered to be reliable, but Raymond James Financial Services, Inc. does not guarantee that the foregoing material is accurate or complete. This information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. Bond prices and yields are subject to change based upon market conditions and availability. If bonds are sold prior to maturity, you may receive more or less than your initial investment. There is an inverse relationship between interest rate movements and fixed income prices. Generally, when interest rates rise, fixed income prices fall and when interest rates fall, fixed income prices rise.
International investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility. Inclusion of the index is for illustrative purposes only. Keep in mind that individuals cannot invest directly in any index. Investments mentioned may not be suitable for all investors. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance may not be indicative of future results. Any opinions are those of the author and not necessarily those of RJFS or Raymond James. All opinions are as of this date and are subject to change without notice You should discuss tax or legal matters with the appropriate professional. Diversification and asset allocation do not ensure a profit or protect against a loss. The Dow Jones Industrial Average (DJIA), commonly known as “The Dow” is an index representing 30 stocks of companies maintained and reviewed by the editors of the Wall Street Journal. The Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care.