The steady diet of headlines pouring out of the Trump administration has been unsettling for most Americans, regardless of where they sit on the political spectrum.
We know equity markets loathe heightened uncertainty. Yes, what is happening in Washington is generating an enormous amount of political uncertainty. Yes, the word “impeachment” has even been bandied about in conventional circles. It was responsible for a one day sell-off in May that cost the Dow 373 points (St. Louis Federal Reserve). This one day sell-off is a classic example of “Distraction Action” in full view.
Blame the knee-jerk distraction action on the allegations that President Trump asked then FBI Director, James Comey, to end an investigation of former National Security Advisor, Michael Flynn. There hadn’t been much downside action in the major indexes recently, so talk of impeachment jarred the short-term crowd.
But, political as well as international uncertainty has yet to generate economic uncertainty. As a matter of fact, the S&P 500 YTD maximum decline is currently at -2.8% (the lowest intra-year decline recorded since 1995). Thus, it really is about the economy.
Given the media’s comparisons to Watergate, let’s take a high-level look at what was happening economically in the early 1970s and compare it to today.
Table 1: Then vs. Now
Inflation rose to double-digit levels, peaking at over 12%
Inflation remains low
Interest rates were spiking higher; prime loan rate hit 12%
Interest rates remain low
OPEC oil embargo roils economy, oil prices rise four-fold
A glut of oil exists today and prices are well below levels of recent years
The unemployment rate jumped as the economy fell into a steep recession
Employment is rising, the unemployment rate is at a cyclical low, and the economy is expanding
Source: St. Louis Federal Reserve, U.S. State Dept.
As Table 1 illustrates, the fundamentals are radically different today.
Beyond the brief synopsis I provided above, I’ll stay out of the political weeds and let you form your own opinions. Stepping briefly into the political arena feels like I’ve stepped into a minefield! But, I felt it was important to provide some context in relation to the markets.
Last April, I touched on the failure by the House to pass a so-called “repeal and replace” for Obamacare. It had little impact on shares. Like it or not, the House finally passed a health care bill last month, and it did little to boost shares.
The true crown jewel for investors, however, has always been a cut in the corporate tax rate. Well, what seemed like a certainty immediately following the election has become murky. In fact, a late May article in the Wall Street Journal entitled “GOP’s Proposed Tax Changes Are No Match for Status Quo--Republican lawmakers’ boldest ideas for changes are on political life support…,” summed up the dilemma the party is facing.
We were told by the pundits that political gridlock and any unraveling of Trump’s tax cut and infrastructure agenda would pound stocks. It’s not yet unraveled but bold economic changes from Washington are at risk.
Yet, as Table 2 illustrates, markets have rewarded investors in spite of these policy risks.
Why? I think what we are beginning to see is the passing of the baton. An investor-friendly agenda in the post-election climate that fueled market gains has been replaced by stronger economic fundamentals.
S&P 500 profits in Q1 came in at the fastest pace since Q3 2011, according to Thomson Reuters. And forecasts for the year have been relatively upbeat. Simply put, the fundamentals “trump” the negative headlines, whether those headlines originate in the U.S. or overseas.
Table 2: Key Index Returns
Dow Jones Industrial Average
S&P 500 Index
Russell 2000 Index
MSCI World ex-USA**
MSCI Emerging Markets**
Bloomberg Barclays US Aggregate Bond TR
Source: Wall Street Journal, MSCI.com, CNBC, Morningstar
MTD returns: April 28, 2017—May 31, 2017
YTD returns: December 30, 2016—May 31, 2017
**in US dollars
The longer-term focus of the markets has always been the economic fundamentals. I believe that focus has not changed. On the other hand, today’s stock market cares about understanding the potential new “policy rules” it can play within. Until the market sees and digests the finality of President Trump’s tax and reform agenda, despite the strong fundamentals, the market will remain susceptible to short-term distraction action.
However, unless the economy is significantly impacted, unexpected and alarming events may create short-term volatility, but they rarely create long-lasting impact.
Shedding light on a confusing maze of options–financial literacy
I recently came across a definition of financial literacy in Wikipedia that I believe sums up the term well. I’ll paraphrase: “It refers to the set of skills and knowledge that allows an individual to make informed and effective decisions with all of their financial resources.”
How do you manage money? How does one come up with financial goals and a plan to reach those financial goals? How do we make effective decisions with our financial resources? One of the goals for Capital Resource Management is to educate the investor.
These are easy questions that don’t command easy answers. You see, the financial arena is much more complex than it was 50 years ago. It seems like everyone is looking for the Investment Unicorn. There is a downside to the proliferation of choices we have today. It adds a layer of complexity and creates confusion. Many don’t know where to begin. Many fall into paralysis by analysis.
My job is to be your financial advisor and financial confidant educating you along the way. That is where I focus my energy.
As we cover the various topics in our meetings, I’ve learned that some folks feel uncomfortable about asking questions they perceive as too simple. Don’t we all?
Let me say this–there isn’t a bad question. I want you to be comfortable with what we recommend. I understand that you reach out to me for assistance with your finances, and I take that responsibility very seriously.
While the financial plans we advocate encompass basic principles, we do not take a cookie-cutter approach. Instead, we tailor our advice to your unique situation. Our process is centered upon earning and keeping your trust by understanding one thing: Understanding your Why!
Every situation is unique, but there are fundamental financial principles that guide our recommendations.
Finally, let me repeat, there are no bad questions. What we don’t know can hurt us. And financial ignorance can be extremely costly.
Let’s talk if you have questions. I’m just an email or phone call away if you have questions. That’s what I’m here for.
Assisting you in pursuit of your financial goals and shedding light on financial complexities provides our team with an enormous amount of satisfaction. Financial literacy is just one of the avenues that will help place you on the road to reaching your goals and dreams.