With the presidential inauguration behind us, it is now time to reflect on the past year and look forward to the outlook ahead.
The volatility that was prevalent in the markets the first three quarters of 2016 transferred into volatility of emotions in the 4th quarter. The election night surprise of Donald Trump winning the presidential election had investment managers bracing for an immediate sharp reactionary selloff. At one point in the early hours of Wednesday morning, the S&P futures were down significantly. Thankfully as the news was digested, and regardless of personal opinions of President Trump, the US stock markets opened nearly flat.
The realization of a Republican President, House and Senate turned surprise into hope that policies may effectively move through to implementation in Washington. With the Republican party traditionally being pro-growth, a sense of optimism for the prospects of economic growth led to a strong rally into year-end.
The strong year-end rally was based on policy implementations that traditionally stimulate economies: reducing corporate tax rates, reducing personal tax rates and less regulation.
The United States has one of the highest corporate tax rates in the world. Making it more beneficial to move companies overseas. By reducing the tax rate from over 30% to 15%, it will not only add to the profits of companies, but keep jobs in the United States. The reduction of tax exposure would increase earnings of US companies and better the prospects for market gains.
By reducing personal tax rates and by keeping jobs in the US, there would be more disposable income. More disposable income typically leads to more spending. The result should be growth to the economy.
Reductions in bureaucratic red tape and regulations will make it more cost effective for companies to effectively do business and expand. Sensible regulation will not only save existing companies time and money, but also allow new companies to form, resulting in additional jobs and increases in competition which ultimately benefit the consumer.
It remains to be seen whether such optimism will lead into actual execution. Thus, the rally that we have witnessed based on hope could sour if policies are not implemented. We will also be keeping a close eye on foreign relations and the strength of the US dollar. Rhetoric coming out of the White House needs to be softened somewhat to maintain foreign allies and not depress foreign trade.
In addition, if the polices are implemented and the US outshines the rest of the world economies, it could strengthen the US dollar to a point where it would be detrimental from a valuation standpoint to US companies that do business overseas. It could become more cost -effective for foreign companies to get goods and services from non-US companies if the dollar appreciates too much.
From a portfolio standpoint, we still favor domestic equities over international for the near term. We specifically like the small cap domestic sector which might have less currency conversion exposure if the US dollar continues to strengthen. However, there are signs of growth coming out of several European countries which lead us to believe that developed international markets may be closer to showing signs of growth and thus increasing prospects of positive returns. We continue to believe a strengthening dollar validates a position that allows us to hedge currency exposure internationally. Emerging markets could also see significant returns if the US economy picks up steam and Europe continues to show positive signs.
With the likelihood of increasing domestic interest rates, positioning the fixed income portion for interest rate sensitivity is important. We believe interest rate hikes will be sporadic enough as to not “shock” the system or drastically effect bond prices. Thus, it is prudent being on the shorter side of the yield curve, but still seek opportunities for interest in some areas outside of treasury bonds or with higher yielding debt. We continue to believe that a portion of the portfolio should be in emerging market debt which provides not only diversification outside of the U.S., but also, quality yield.
VCM Balanced ETF Strategy
We are also pleased to announce that our Balanced Strategy has receive a 4-Star rating by Morningstar and finished 2016 in the top quartile in its category.
As always, I stress that in this ever-changing political and economic environment, sensible diversification is the key to weathering any market uncertainties.
Jason M. Vavra, CPA, PFS
The information contained herein is not considered an offer to buy or sell any securities referred to herein. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors. There is no guarantee that the figures or opinions forecasted in this report will be realized or achieved. Past performance is no guarantee of future results.