U.S. Economic & Financial Markets Outlook: Coming Off A Strong 2017, Will Both the Economy and Markets Gain From the Trump Tax Cuts! 

 (Y H & C Investments may have positions in companies mentioned in this newsletter.  It is the responsibility of each investor to research possible investments mentioned so they can decide on the appropriateness and suitability of the investments consistent with their risk tolerance, risk constraints, and return objectives)

 In 2017, the Dow Jones Industrial Average gained 25.08 (2.01% in December)%, the S&P 500 rose 19.42 (1.19% in December), and the NASDAQ soared 28.24% (.81 in, well, you know). With domestic stock markets posting a strong year, the last two quarters of GDP growth exceeding three percent, the fourth quarter projected to be even stronger (> 3.5%), and a fresh tax cut changing existing corporate income tax rates from among the globes highest to competitive with nearly any country in the world, the narrative about the US economy could very well swing from ‘What should be done to strengthen the economy?’ to ‘What has to be done to cool it down?’ In anticipation of a better economic environment, new Fed Chief Jay Powell has planned at least two, but probably closer to three interest rate increases in 2018. Some believe the quick path to interest rate normalization may be too late to prevent a rapid rise of inflation. However, with wage inflation contained (except for recent corporate news of salary increases and bonuses after passage of the tax cut), energy still below historical levels, and commodity prices mostly in check (except for copper), the big I isn’t a problem (yet?). Unemployment remains at very low levels but the labor force participation rate is nothing to be in awe over (63%, below historical averages). With retail sales sharing their best trends in nearly a decade and small business confidence soaring, business investment seems poised to surge.

Corporate earnings remain strong and with tax repatriation and a huge corporate tax cut bolstering any domestic profit generator, one should expect far more risk taking and that bodes well for merger and acquisition activity, as well as higher capital investment levels. What could upset the picture? Perhaps a similar situation at the Federal level as what took place in Kansas after a huge tax cut a few years back (massive deficits). Time will tell, but right now stimulus is in high gear for the US. economy.

Global Economic & Financial Markets Outlook: International Markets Outperform US In 2017 as Asia Leads the Way ! (All country index data provided by the market data section of the Wall St Journal, December 29, 2017.)

 Global financial markets experienced a large improvement in 2017. Led by Asia, a synchronized global recovery saw gains in all continents across the world. Of course, some geographies performed better than others, as witnessed by the dramatic results in Asia, which compared favorably to the mature markets in North America and Western Europe. Let’s take a look with numbers: Asia was led by Hong Kong (Hang Seng, +36%), Mainland China (Dow Jones China 88 Index, +28.9%), India (Sensex, +27.9%), the Philippines (PSEI, +25.1%), New Zealand (NZX, +22.0%), and Japan (Nikkei, +19.1%). Europe top performers, mostly from the East, were Turkey (BIST 100, +47.6%), Austria (ATX, +30.6%), Hungary (BUX, +23.0%), and Poland (PSI 20, +23.2%). In South America, Argentina again led the way with the Merval soaring (+77.%), and strong gains were found in Brazil’s Bovespa (+26.9%) and Chile (Santiago, +30.6%). Nice performance came from the UK’s FTSE 250 (+14.7%) and the Johannesberg Index (JSE) as well (South Africa, +17.5%).

Looking forward across the globe, one major question to consider will be the trend of central banks to reverse quantitative easing, led by the US and followed closely by the ECB. A second issue is the effect of the US decision to dramatically lower corporate tax rates to make them more competitive with the rest of the globe. Countries like Britain, France, are looking at similar moves with Germany rumbling about it as well.

The Art of Contrarian Thinking-Just Because A Stock Is Down, Doesn’t Mean The Company Stinks(Y H & C Investments may have positions in companies mentioned in this newsletter.  It is the responsibility of each investor to research possible investments mentioned so they can decide on the appropriateness and suitability of the investments consistent with their risk tolerance, risk constraints, and return objectives)

 One of the hardest parts of understanding capital markets is the concept of derivatives. Most people associate derivatives with higher math, typically a calculus class. Derivatives are essentially the idea that the price of asset x is based on the results of Y, usually the performance of business x. Many times, the price of a stock declines tremendously relative to how the business performs (or doesn’t). Often, the company stock price would indicate operational results are falling off a cliff, but upon further investigation, the reality might be the business is changing, or undergoing trying conditions, or is in the midst of some external event, like a merger or takeover offer. These events may be reflected extremely by the market loss from a falling equity price. The company might be a darn good one, or at the very least, not poor, having plenty of merit, and may reflect a possible investment opportunity. One actually has to go and find out what is taking place in the business and why investors have reacted poorly to it. In my experience, understanding the perspective of company management in terms of how they view the enterprise, and just as importantly, the time frame of how the business will evolve, might be as important as evaluating the business itself. If you don’t have the patience to hang in with the company until they execute their plan, it is difficult to have long term success with investing. I hope this helps you look at stocks with a longer time frame and more analytical view.

 

Disclosure

Investing money in capital markets involves risk and could result in losing money.  Past performance is no guarantee of future results. Future results are likely to be different from past performance. All equity portfolios involve risk and may lose money. One should research any investment and make sure it is suitable with your objectives, risk tolerance, risk profile, liquidity considerations, tax situation, and anything else pertinent to your financial situation. Also, attaining or holding the CFA credential in no way suggests performance will be superior than a market index or market return.