As the 1st quarter of 2017 comes to an end, spring time is upon us and the US Economy enters a time of uncertainty. As Mark Twain once said, October is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.
This could be the year when we have corporate and individual tax reform; business friendly regulatory changes and spending on US infrastructure. Or at the same time, we could experience a year of disappointment with little if any progress on these fronts. Just recently, hopes for a Healthcare system overhaul failed with a Republican health care bill pulled from the House floor before a vote. "There is a good chance Congress will greatly dilute or delay Trump's fiscal stimulus program and disappoint Wall Street and Main Street," said Bernard Baumohl, Chief Global economist of the Economic Outlook Group.
The Wall Street Journal ran an article on March 1st titled, "This is now the Third -Longest Economic Expansion in US History", by Josh Zumbrun. "The arrival of March meant that the current economic expansion has now entered its 93rd month, surpassing the 92-month expansion in the 1980's, to become the third - longest in US History." According to the National Bureau of Economic Research, in records dating back to before the Civil War, the US has had longer spells of growth only twice, one span in the 1960's and one in 1990's. If this expansion can make it to next summer, it would be the second longest in US History. By mid-2019, it would become the all-time longest on record. According to this report however, recessions have become less frequent and thus expansions longer, quite possibly because of an economy that is less cyclical, due to a shift away from an industrial economy.
It's been a strong start to the year, with the stock market, as represented by the S&P 500 Index, being up 5.5% in the first 3 months of the year. Furthermore, it's interesting to note that the S&P 500 is up almost 10% since the election in November. The 3 year annualized return for the S&P 500 Index now sits at 8.1%. Still, that is below the average annualized return of 10.28%, over the last 91 years.
Attached is an interesting piece from Vanguard: "When will we get back to average market returns?" Only 6 years out of the 91 years studied had a return that fell within 2 percentage points of that average annualized return of 10.28%. The back page of this piece outlines the bond market, showing an average annualized return of 5.31% over the last 91 years. Again, in only 24 out of those 91 years did the bond return fall within 2 percentage points of the "average" annualized return of 5.31%.
We point this out to help everyone realize that the "average" return is not a number that can be expected yearly with any predictability. There are actually many years of wide fluctuations in equity and bond returns and one must plan accordingly.
Interest Rates have recently ticked up a bit, with the yield on the 10 Year Treasury now near 2.35%. The 52 week high on the 10 year yield was 2.6%. Most interest rate forecasts seem to peg the 10 year Treasury Rate in a range of 2.5-3.0% for 2017. The Fed had raised rates for only the 3rd time in the last 10 years, in March. It's possible that we may see 2 more rate increases for the year, (bringing this year's total to 3). But I caution that if this year is full of disappointments, with little if any progress made on tax reform and other ambitious goals, not to mention other geopolitical risks; we could see the Federal Reserve having to temper its rate expectations.
The Gross Domestic Product for the full year of 2016 was 1.6%. Most estimates for the 2017 GDP fall between 2 -2.5%. Yet again, these forecasts carry far more uncertainty now than in years past, as they are predicated on a more relaxed regulatory environment. However, the risks remain high on the down side, with the potential of a trade war, or a strengthening dollar. According to the Kiplinger Letter, "The biggest tailwind for the economy is shoppers who are ready and able to spend. Consumer Spending accounts for 69% of U.S. GDP. Oftentimes, GDP estimates are a moving target that will have to be refined as the year progresses."
We have attached another chart titled: "Stocks, Commodities, REITS, and Gold 1980 - 2016". This chart shows the compound annual returns since 1980 through 2016. The core Vanguard Funds used to build the equity side of our portfolios, encompass US & International stocks as well as REITs. Diversification is key and with Index Funds we use, you gain exposure to all of the different sectors of the stock market through just a few low cost funds.
Many of you may be asking, with all of this said, what does it mean to me? For many of you, your equity allocation has bumped up over the last few years from this move up in market values. It may be time to think about reducing your allocation to Equities. Hopefully, with interest rates moving up a bit, there will be more options for some of the cash that has been earning very little in the money markets, CD's and savings accounts.
For now, our view on investing in the fixed income markets has not changed. We are still focused on a core group of Vanguard Bond funds that are relatively short in duration. However, we do feel that we may be getting closer to having more options for you to improve yields in the coming year or 2, by way of allocating money to individual GNMA's, Treasuries, and Municipal Bonds. Please do not hesitate to call to review your portfolio or to speak with us about anything on your mind regarding your finances.
Our Investment Committee continues to meet monthly to review the current state of the economy as well as doing continuous research on the core positions that we recommend from Vanguard. We continue to monitor Interest rate changes and their implications to fixed income investments. Be assured that as that landscape continues to change, we will be out in front of the trends, working to provide you with the expertise you have come to expect over the years.
We want to thank all of you for the confidence you have expressed in us through all the referrals we have received in the past year. Our team welcomes the opportunity to work with anyone that you think would benefit from the services we provide. If you know of anyone that would like to receive our quarterly newsletter, please let us know.
Bryan Bastoni, CFP