January 6, 2017
As 2016 comes to an end, we look back at a year that was filled with many ups and downs. On January 20, 2017, we will swear in the nation's 45th president. It's clear that with all of the promises made on the campaign trail, the new president will have his work cut out for him.
Top on the list, with a new Republican president and a Republican controlled Congress, we could be looking at the most significant tax changes in the last 30 years. How fast, and if that happens, is the big question. Per the latest Kiplinger's Tax Letter, the last major revision to the tax code was in 1986, under Ronald Reagan. Health care reform was also high on the list and it will be interesting to see what comes of Obamacare going forward. It's clear that health care costs in the United States have spun out of control and something does need to be done. Many of us will agree that while some of these things may make sense from a financial standpoint, the temperament of our soon to be president is the one question mark that remains a worry.
Trade was also a hot button topic during the campaign and it will be interesting to see how that evolves. Many unresolved issues around the world still have to play out in 2017. We will have to wait to see the real impacts from Brexit. European Central Bank and Japan continue to expand assets and keep interest rates low with an easy money policy. China's growth concerns, that have been mostly quiet during 2016, may come back to spook the market. Banca Monte dei Paschi di Siena, the 544 year old Italian bank, is having difficulty securing needed funding. Rules put in place by the Euro zone after the sovereign debt crisis of 2009, require creditors to face losses before any form of state aid is available. As the Business Insider reports, the problem is that a disproportionate number of creditors of the bank are not institutional investors but just regular people who bank there. So the concern is that the life savings of millions of ordinary Italian citizens could be wiped out. The strong dollar is also something to watch, as it can impact many US companies that rely on selling their goods and services overseas.
We have enclosed a handout titled "Global Market Barometer" to help familiarize you with the trailing Global Markets' one year returns, through the end of the 3rd quarter, 2016.
The US Economy had its strongest growth of 3.5% in the third quarter of 2016, dating back almost 2 years. That was after Q1 2016 Gross Domestic Product rate of 0.8% and Q2 2016 GDP rate of 1.4%. Even with the strong 3rd quarter GDP, we still expect the full year GDP for 2016 to come in around 2%. Pretty close to the "recovery average" of 2-2.5%. Most predictions for 2017 put GDP growth around 2.5%. Some question if that will be too optimistic, with slowing employment gains; "Headline Inflation" that may start to inch higher; and rising energy prices, which may start to impact consumer spending.
Now, as we get our DOW 20,000 hats out in anticipation of the big milestone, we want you to keep in mind that the Dow had started the year at 17,425.03 and within 2 weeks of the start of the trading year, had quickly shed almost 1500 points, to close January 15, 2016 at 15, 988.08 . If that was any indication of what the year would have brought, many would have missed out on the US Stock Market return of approximately 10% for 2016. We have included a printout on the Vanguard Stock Funds that we follow closely. The performance of these funds track back from the market bottom in March of 2009, through the end of December 2016. We believe that diversification through low cost index funds is still your best bet, with those (4) stock funds owning well over 11,000 individual stocks; encompassing over 42 countries; and made up of Large, Medium and some Small Cap stocks.
Lately, the fixed Income market has been getting a lot of attention. Interest rates are something we will watch very closely in 2017, as the 10 year yield that started the year at 2.25%, closed the year near 2.5%., after falling to a historic low yield in July 2016, of 1.375%.
The Federal Reserve raised Interest rates ¼ of a percent in December, for only the 2nd time in 10 years. We now have a Fed Funds rate between .50% and .75%. The Fed said in its latest meeting that it would aim to raise rates 3 times in 2017. We find that to be very aggressive, especially since predictions by the Fed at one point noted possibly 4 rate hikes in 2016 and as it turned out, there was only one rate increase. With the market being caught off guard by a Trump election victory, we saw interest rates move up during the month of November. Post-election, the 10 Year yield moved from near 1.85% all the way up close to 2.5% but has since leveled off in December. We expect to see a much more gradual increase in rates in the year ahead.
We have also enclosed an additional print out on the Fixed Income Funds from Vanguard. The performance of those funds tracks back to the market bottom in March of 2009, through the end of December 2016. Keep in mind, there is no guarantee that interest rates will continue to rise in the short term as unexpected geopolitical events or new fiscal and monetary policy could result in downward pressure on rates.
I think the point we are trying to emphasize is that the "euphoria" of the last 6 weeks is probably going to get a reality check in the coming months. It doesn't mean that it's time to sell, as trying to time the market has proven to be a bad formula. We still believe that the focus on a long term, diversified portfolio is the way to go. Our investment committee we be convening again in January to collectively review the market and your investment options. As always, please do not hesitate to call us should you have any questions or concerns with your portfolio.
We hope that you are able to spend time with family over this Holiday Season and wish you all a Healthy and Happy New Year.
Bryan Bastoni, CFP
Certified Financial Planner, TM
P.S. With the winter season upon us, we ask that in case of a weather emergency and we cannot be reached, you call TD Ameritrade directly at 800-431-3500, if you need to execute a trade quickly.