3rd Quarter 2017 Market Commentary
The third quarter enjoyed another wonderful performance by the market. The S&P 500 and the Dow Jones were both up over 4%, and the trailing 12 months of both of these indices are up over 18%. Our take on all this joy related to the “Trump Bump” is that there has been supporting data to create a great market. There has been low inflation, low interest rates, better corporate earnings on balance, and the promise of lower taxes and a better health care system. Admittedly, these are unfulfilled promises, but it paints a picture of a business friendly environment.
Whether you are a Donald Trump fan or not, there has been $5 Trillion of new wealth created since his election in our stock market. Part of this euphoria is based on legislative change in terms of corporate tax rates and not gridlock. We will see. We feel the market headwinds picking up possibly in the 4th quarter and choppier in 2018. Why? The market has been positive for 7 back to back quarters. That is almost unparalleled. Additionally, the Fed has signaled that they are tightening again in December and probably 2-4 times next year. They are also reducing their balance sheet. While all of this economic unwinding is occurring and rates move slightly higher, we see this action as a negative for stocks. At the very least, there will most likely be more uncertainty. Finally, the American market has priced in the tax cuts, and it is not a done deal yet. We believe that there will be cuts, but when and how much are the variables that concern a market potentially dominated by more short-termism. The good news is that for the 3rd quarter, market volatility is at an all-time low, and things appear a little quieter on the foreign affairs front.
What are our recommendations? Take some profits, and eliminate that long term capital loss that just never quite seemed to revive itself. We feel that a 15-17% cash position in case we get that 5-10% correction is warranted now. As importantly, keep your bond portfolios short to intermediate, and make sure you own your share of financials and technology. These two areas stand to benefit the most in our markets under these financial circumstances. Finally, if you really don’t have any money overseas, now is a good time to position oneself there. They are still behind the moves in our markets but are beginning to show real performance. Emerging markets outperformed our indices by several percentage points, and Brazil was the strongest index market. Part of Brazil’s performance was mainly due to reform progress.
At this point, stay long stocks, raise some cash via harvesting some rewards, and don’t be undone by future volatility. It is expected and our opportunity.