Spring 2017

Quarterly Commentary

Is this the goldilocks investing environment that many investors have been waiting for? Interest rates remain low, inflation is tepid, our economy is slowly accelerating, stock fundamentals are strengthening, on and on…! What could possibly go wrong?

Well, many things could go wrong. We have highlighted a handful above. The Lafleur & Godfrey investment team is cautiously optimistic but feels strongly that we are in the above-mentioned ‘accountability period’. The period where administration promises must be kept, economic data hopefully delivers & corporate earnings targets are hit. The individual names that we own in the mega trend sectors of the economy continue to perform well. Their prospects are favorable but it may be prudent to begin hedging by paring back equity allocations in the coming quarters.

Economy Positives

Reflation trade upon us?
Synchronized global economic growth is beginning to take hold. Gross domestic product estimates have been increasing worldwide – which have led to cyclical tailwinds and improved risk appetite by businesses.

Bank lending still robust U.S.
Banks continue to lend – with most major banks increasing lending mid to high single digits in year-over-year percentage terms. Loan growth will be necessary to sustain our improving economic prospects.

Make building great again!
Proposed pro-growth economic policies and fiscal stimulus have encouraged a risk-on mentality to corporations. Capital investment trends are rising – led by warehouse construction and oil & gas equipment.

Economy Negatives

Payrolls peaking?
Our economy only added 98,000 jobs in march – down from 219,000 and 216,000 in the prior two months. Lumpy data is to be expected but this payrolls report waves a yellow flag to the u.s. economic bulls.

Fiscal stimulus deferred?
With the recent repeal-and-replace healthcare defeat in congress, one must wonder not only ‘when’ but ‘if’ many of the president’s proposed economic, tax and fiscal policies will be enacted.

“U.S. dollar is too strong”
With the trade rhetoric getting louder, President Trump has responded by softening his isolationist stance. He recently talked down the dollar after becoming concerned that its strength may hurt our trade & exports.

Financial Market Negatives

180 degree foreign policy shift?
Post-election, many wondered whether or not the new administration was all bark and no bite. Recent military action in syria and afghanistan speaks volumes. Geopolitical risk is here to stay!

U.S. treasuries and stocks diverging!
Over the last month, the post-election trend of both rates and stocks rising has broken down. Which market is right? Is the bond market warning us that softer economic data is on the horizon? Time will tell.

Will the boxes be checked?
The market has been supported by promises of pro-growth economic polices & strong expected earnings. we are now entering an accountability period for the market where execution must equal the hype.

Financial Market Positives

Fundamentally solid!
Yes, U.S. equities have extended their gains but, importantly, the rise in stocks has been accompanied by improving fundamentals. earnings growth, led by energy & financials, is expected to grow in the high-teens!

Low Rates = Constructive Markets
While rates are increasing, the overall level of rates remains low. With bond issuance strong & funding costs inexpensive, businesses can make investments & buy back their own stock – a win-win for investors.

Bye-bye regulatory burden!
Trump’s main advisors are successful private sector leaders. Decreased regulation could be a bigger positive than tax reform. Confidence is improving & investors are steadily moving money into stocks from bonds.