Winter 2016 Market Quarterly

Winter’s Here!

Market QuarterlyAlthough winter officially arrived just a short time ago, it seems it’s in full swing already.  Of course, living here in Goshen, CT makes it all the more real.  We’ve got about six inches of snow on the ground and the recent temperatures have been below freezing all day long.  We’ve had to cut our hikes a bit short due to frostbite fear for our dogs.  We’ll make the best of it and we hope you all do as well.

The picture in the upper-left corner is of our nephew Anthony.  He’s three years old.  I put this picture up because it reminds me of how special it is to have a young one like this around during the Holidays.  He gets very excited with each and every gift put in front of him.  His world revolves around smiling and laughing.  Sandra and I have always enjoyed the Holidays, but having Anthony around makes them even better.  We hope you all had a fantastic Holiday season and wish you the best for the new year.

Last Quarter Round Up

Last quarter I said that we seemed to be moving away from the sideways market I’ve been talking about for so long, but that it was early to get too excited given what may occur in our November presidential election.  Well, Donald Trump walked away with a stunning, surprise victory in the election and U.S. markets have responded favorably.  The S&P 500 was up +3.8 for the quarter and +12.0 for the year.  Other markets were less positive with developed international down -0.7 for the quarter and up only +1.0 for the year.  Emerging markets were very mixed with the quarter down -4.2, but up +11.2 for the year.  The U.S. bond market was also mixed, down -3.0 for the quarter and up +2.7 for the year.

My sense is that the markets have responded, perhaps too keenly, to the Trump campaign rhetoric.  Overall, Trump appears supportive of a stronger U.S. business environment.  This does imply higher stock prices and potentially higher inflation, which would be bad for bonds.  His negative NATO views could have increased uncertainty for Europe, and their markets responded negatively.  Stronger U.S. business could lead to a stronger dollar, which would be bad for emerging markets…and their markets were down as well.  My concern is that global markets might be a bit too quick in reacting to a man with virtually no political experience.  While it is true that he may pursue better healthcare, tax reform and infrastructure spending, and those actions could be good for consumers and businesses alike, there is also a chance he won’t pursue those things, or that his plans will be dashed by legislative reality.

Current Quarter Outlook

I must admit it does appear the sideways market in the U.S. is over.  While encouraging, I don’t know that we are completely out of the woods.  As the Trump presidency proceeds, some of the excitement and expectation may temper and the markets could adjust backwards.  Going further, Donald Trump fought the Republicans almost as hard as he fought the Democrats.  As I eluded to above, his policies may not be a slam-dunk with our current Congress.  There’s no guarantee his agenda, even if pursued as suggested, will move forward.

The Federal Reserve (Fed) did move interest rates up in December by 0.25 as I expected.  This was the first and only rate increase in 2016, which is notable only because the Fed predicted in December 2015 it would move rates up four times in 2016.  This December the Fed is predicted three rate hikes in 2017.  I continue to be skeptical given the generally low level of Gross Domestic Product (GDP) growth and low global interest rates.  I don’t see how the Fed can push U.S. rates aggressively, unless we see a spike in inflation, which thus far has not occurred.

Looking ahead, it seems less and less likely we will see a recession in the U.S. in 2017.  I expect slow to moderate growth to continue.  My equity strategy is to remain fully invested, a slight overweight on the U.S., stronger underweight of International and a slight underweight to Emerging Markets.  In fixed income, I remain invested with greater exposure to credit paying higher yields.  I am moving away from my overweight in Alternative investments.

Barron Financial Group, LLP is a fee-only Registered Investment Advisor regulated by the Connecticut Department of Banking.

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.