This year will see many changes. Last year’s election will have a large impact on the economy going forward. Some sectors have already reacted favorably, while others are expected to decline. One trend that will continue is ideological driven news. Depending on which political view you take, the information and news you receive can be vastly different from what others have heard.
No matter how you view the world, there will always be one universal truth: Reality does not care nor conform to our opinions. Another truth is that your money is hard earned. The last thing you should do is to throw it away based on speculation. Over the coming years, there will be “fake news” and many unqualified opinions. I would not recommend basing financial decisions on this sort of information.
As a Certified Financial Planner™ and Chartered Retirement Planning Counselor℠, I firmly believe that investments should follow a diversified portfolio that fits an individual’s unique goals, investment horizon, and risk tolerance. I focus my clients’ investments on a core strategy that attempts to reduce the risk from the unexpected. That does not mean that I will ignore foreseeable market trends. We can use the past as a guide and draw parallels to apply towards the future.
All financial predictions are bests guesses based on experience and the information available. Short of using illegal insider information, there is no way to know how the market will move. Therefore, it’s extremely important that you vet the sources of information before making any financial decision.
My outlook for 2017 is an opinion based upon my education, experience, and research which has been cited throughout this article. Before accepting any information on something as important as your finances, consider factors such as the source’s expertise and how the person may or may not benefit from any advice given.
2017 Market Outlook
The current market analysis seems to be split along party lines, though the economists who have more accurately tracked the market in the past currently hold negative views. Another consideration is the fact that we are currently in the second longest bull market run since 1945. Total U.S. stock valuation in relation to our gross domestic product is just below where it was in 1999. Eventually, these market runs end. I believe that two large factors in impacting investments in 2017 will be the end of this bull market and the Republican tax policy changes.
The positive will be a lower tax burden enacted retroactively to January as well as deregulation which can spur growth. Already, the markets have reacted favorably due to this. Financial sector stocks have seen the largest growth since the election. I would expect to see growth in the Small Cap sector as restrictive regulations are removed.
The new administration is poised to be business friendly, though not all businesses will be treated equally. As one would expect, the Republicans favor established people and businesses. I have already covered the tax changes proposed in a previous article (which can be reviewed here), so I won’t rehash that topic in-depth. I will reiterate that these plans help the wealthiest Americans as well as our large corporations. Unfortunately, the code changes come at the expense of the middle class and small businesses.
The shifting of the tax burden, in addition to increases in the Social Security tax, will begin to drag on the U.S. economy. This impact may not be felt by most people until 2018, but investors will have a better understanding of the new tax code by year-end. Their concerns will be priced into the market at that time. I do not believe that the tax changes alone will dampen the market. My concern is that when the bull market ends, it will amplify a downturn.
The World Economic Forum is meeting in Davos Switzerland just days ahead of the 45th President’s inauguration. The theme this year is uncertainty. Uncertainty always has an adverse impact on the stock market. This uncertainty will impact your investments. We know that the bull run will come to an end. We know that there will be changes to the tax code. What remains uncertain is how when these changes will impact our economy.
The 2016 election was a referendum against the establishment. So far, the Trump Administration is showing that it will not follow the rules of the past. Progress and change are an important facet of life. In some cases, however, it is prudent to conservatively stick to tried and tested rules. One of those rules is to retain and promote competent leadership. The Trump Administration seems to, at this point, be ignoring that rule.
Putting politics aside, from a purely business standpoint, many of the cabinet choices lack of experience seems to create the potential for unnecessary cost, both monetarily and politically. Costs will rise due to mistakes stemming from political inexperience. You will need to account for lower productivity as a result of employee morale declining under leaders opposed to the organization’s mission. Finally, you cannot discount the cost of litigation that is bound to come against these leaders if they act in ways contrary to the goals they are required by law to perform.
Hopefully, this new leadership will surprise us with success. History has shown otherwise. The majority (90%) of small businesses fail due to mismanagement and incompetence. Failures of governmental agencies will hinder our economy. As of inauguration day, the media considers this to be the worst Cabinet in American History. It’s difficult to remain optimistic that these leaders will refrain from doing more harm than good.
Much of the administration’s plans are based on the strong economy they are inheriting from the Obama Administration. The Trump Administration plans on massive spending projects such as expanding the military and constructing a border wall. The 2017 tax proposals add an additional $6 trillion to the deficit. Repealing the Affordable Care Act will not only take health care away from millions, it will lose 3 million jobs and cost $1.5 trillion. Previous Republican administrations have both promised tax and spending cuts. Unfortunately, those administrations only followed through with tax cuts, leaving us with deeper budget shortfalls.
This pattern can lead to a massive explosion in the deficit. Rather than pass on cuts for wealthy Americans, the nominee for Treasury Secretary proposed changing how the tax cuts are measured in a controversial process known as ‘dynamic scoring’. Unlike President Trump’s previous business dealings, our nation does not have the option of filing for bankruptcy. This means that the President will be in uncharted waters when attempting to handle this problem.
Prior to the Great Recession, there were similar tax cuts along side of a large government expansion. While some would like to rewrite this history, reality cannot absolve them. These failures are not even a decade old, yet the new administration seems unconcerned about repeating this mistake.
The factors cited are cause for concern going forward. If you’re among the wealthy, the overall economic conditions may negate any tax savings. Middle class investors will be squeezed by tax hikes and a dropping investment market. This is the reason the majority of economists warned about proposals made by Trump prior to the election.
Even with the potential headwinds, investors are likely to stick with the market in 2017. We have begun the high part of the market cycle. This part of the cycle has been described as “irrational exuberance” in the past. There is the potential that political risk will impact the economy, yet most will ignore the warning signs. This is common and should be expected. Near the end of the year or in 2018, investors should start pricing their anticipation of a down market.
Phoenician Financial Planning’s Investment Strategy
Your strategy should remain, at its core, a diversified allocation. I am focusing my client’s investments on well established, large value oriented companies that tend to remain steady during uncertain times. I will also use established Asian and European investments to diversify against problems in the U.S. markets if they materialize.
Even with the potential for higher returns for the early part of 2017, I am avoiding smaller companies. These investments are prone to failure first during market turns. While there could be a period of upswing, it is hard to time the market reversals. Small capitalization investment funds move quickly, making it difficult to sell these securities at the right time. I will also hold off on emerging markets for the time being, as they act in a similar manner. Trump’s decision to drop trade deals will also impact these markets.
The Fed has proposed interest rate hikes, which lead me to believe the use of lower yielding, shorter term bonds prudent. If the economy turns negative, it may cause a pause in interest rate hikes. Using bonds with too low of a duration may result in yields below inflation, and should therefore be avoided. Finally, many of the new administration’s proposed strategies for border protection and domestic growth are inflationary in nature. Both gold and inflation protected treasury investments will be used to hedge against that issue.
Only client’s of Phoenician Financial Planning are privy to the investments selected. The investment process takes into account overall diversification, risk tolerance, and individual investment time horizon. Market research is gathered from a variety of industry sources. Once market assumptions have been made, core investments are made with satellite investments suited to the foreseen market conditions. The funds selected are on a quarterly basis. Changes are made as needed and appropriate.
We may not be able to predict the future, but we can help you plan for it.
Investment advisory services are offered through Phoenician Financial Planning, LLC, an Arizona domiciled registered investment advisor. This communication is not to be directly or indirectly interpreted as a solicitation of investment advisory services to residents of another jurisdiction unless the firm and the sender of this message are registered and/or licensed in that jurisdiction, or as otherwise permitted by statute.
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