September 30, 2017
By: Jim Thibault (Managing Partner)
Although the current weather pattern here in CT has been warm and comfortable, the leaves are starting to change and fall is in the air. I like fall, even though it inherently means winter is coming. I hope you all had a great summer and are experiencing a smooth transition into fall. Enjoy and be safe.
Our vacation at the end of August was terrific. Sandra and I got in a lot of good reading, and our tradition held, the TV wasn’t turned on once. The photo to the side is our oldest dog, Pharah. We rescued her three years ago and she’s had six surgeries since then due to cancer. And yet, to look at her, you’d never know. Our vet estimates her age at about 13 years. She struggled this vacation with longer hikes and steep inclines, but Pharah is a happy dog with plenty of affection for us and our other two dogs. It’s hard to see her get older, but a great rescue story no matter what.
Last Quarter Round Up
Stocks around the world performed well again in the third quarter. The U.S. rally continued with the S&P 500 up +4.48%. And for yet another consecutive quarter, international and emerging markets both outperformed the U.S. with international up +5.40% and emerging markets up +7.89%. This extends the global stock outperformance of U.S. stocks, and leads me more in the direction of global stock momentum being a firm trend. The bond market was also up +0.85% for the quarter.
I’m a believer that the impressive stock rally seen since the election of Donald Trump has been a Trump rally, meaning, investors looked at the election of Donald Trump, and his promised policies, as being potentially good for the U.S. economy and stock market. On July 28th we saw this logic tested. That day the Senate failed to approve the Republican “Repeal and Replace Obamacare” bill for a second time. Here was one of Trump’s foremost campaign promises that did not come to pass in spite of having a Republican-controlled Congress and White House. If you believe in the Trump rally, then you might also believe that the failure of this bill to pass is a sign that Donald Trump may not be able to put the policies in place that had investors so encouraged. If the policy doesn’t follow the promises, is the rally justified? The S&P 500 went flat to slightly down over the next month until tax reform became the latest White House policy focus.
Current Quarter Outlook
I’m mildly confident that we’ve seen the last of U.S. healthcare reform legislation, at least the GOP version of it, for at least a while. Thankfully, this appears to be in favor of tax reform legislation, which I suggested in the Q2-2017 newsletter was on-hold, but not dead. Legislation can get ugly, and tax reform is no different, but there seems some room for common political ground. I don’t think tax reform needs to be a purely partisan process. Perhaps I’m naïve. The Federal Reserve (Fed) held interest rates in September, but raised the stakes of current monetary policy nonetheless. It did this by formally announcing something it has been talking about for months…reducing the size of the Fed balance sheet. The balance sheet, which is made-up of a combination of U.S. Treasury and mortgage-backed securities, expanded from $900 billion in 2008 to $4.5 trillion now. The expansion was driven almost entirely by Quantitative Easing (QE) in response to the Global Financial Crisis (GFC) in 2008. Balance sheet reduction will take place by allowing securities to mature and exit along with active selling. Like QE, this is significant policy from the Fed. Fortunately, the Fed has been clear in its policy intentions and that clarity helps prevent market over-reaction.
My momentum indicators continue to suggest global stocks are in control, so I will hold those positions in appropriate portfolios. My research indicates that inflation forces are weakening, not strengthening as we might expect in a rising interest rate environment. I will reduce exposure to inflation protected bonds and add to short-duration bonds in response. I remain neutral on alternative investments.
Barron Financial Group, LLP is a registered investment adviser.
This newsletter is for general information only and should not be considered investment advice.
Investors should consult with a trained investment professional to discuss their particular situation.