Fall 2017

Quarterly Commentary

While it is human nature to be more comfortable being ‘consensus’, there is a growing belief on Wall Street and Main Street that we are living in a ‘glass half-full’ economy as opposed to the general view that we are ‘half-empty’.  As a result, we believe that the strong market performance over the past year is a reliable barometer that, if Congress does its job and passes corporate tax reform, we may just be in the early innings of an accelerating economy. 

It is this belief that keeps us ‘in-the-market’ and overweight equities relative to bonds.  Lower corporate tax rates may be right around the corner.  We believe this is just what the doctor ordered!  We are entering a historically seasonally strong period for the markets.  Patience will likely be rewarded.

Economy Positives

Economic momentum is accelerating!
Both the ISM Manufacturing and Services Indexes posted strong reports in September.  Manufacturing was at its best level in 13 years and Services, which makes up 90% of the U.S. economy, hit its highest level in 12 years!

Corporate America has its animal spirits back!
The impact of recent regulatory changes (freezing and cutting of regulations) has largely gone unnoticed by Main Street.  However, CEOs have responded to a pro-business climate by increasing capital expenditures and budgeting for new hires.

Will corporate tax reform boost our economy?
We believe the answer is Absolutely Yes!  With Congress nearing completion on the details, we believe lower corporate taxes, the repatriation of foreign cash and a massive infrastructure package will all be huge positives for our economy.

Economy Negatives

Is there too much leverage in the system?
Corporations and consumers have leveraged up as the economy has expanded.  We remain a bit concerned that if either the stock market or housing market were to pause or retreat that the increased indebtedness could lead to a recession.

Washington DC’s report card full of Incompletes!
While many of us have faith that our elected officials can get some things done, there is pent-up frustration and concern that recent legislative failures and partisanship will doom any potential for tax reform before the mid-term elections.

Will there be a Hurricane snap-back economic rally?
The U.S. lost 33,000 jobs in September versus an expected gain of 90,000.  Hurricanes were stated as the primary reason for the decline.  We should expect other near-term economic figures to also disappoint.  Will this be a blip or a new trend?

Financial Market Negatives

Is the Fed on the verge of a policy mistake?
Some economists have suggested that the Fed maintain its rate-hiking schedule as inflation has been slowly on the rise.  Recent comments suggest they will keep rates ‘lower for longer’.  If inflation accelerates, this would be problematic.

Are investors too complacent?
  It has been nearly a year (Election Day) since the market has experienced a meaningful downside move.  Volatility, as measured by the VIX, is at all-time lows which begs the question: How much good news is already priced into the market?

Financial Market Positives

America’s wealth is on the rise!
Recent economic momentum is the result of increased investor confidence due to the wealth effect of the rising stock and housing markets.  As long as the Federal Reserve maintains its gradual interest rate strategy and inflation in check, the outlook is quite bright.

The earnings outlook remains favorable. 
Recent double digit percentage year-over-year earnings gains have helped buoy stocks.  If corporate tax reform is passed, every 1% decline in corporate taxes equate to +$2 in EPS for S&P 500 earnings for next year.  This would be a huge plus for stocks!

Expect favorable year-end seasonality!
As year-end approaches, we expect under-performing portfolio managers that are under-invested in stocks to reallocate and ‘chase’ performance by adding to winning names.  This ‘window dressing’ should drive equities higher near-term.