January 2017

Index Month / Year to Date
Dow Jones +0.62% / +0.62%
S&P 500 +1.89% / +1.89%
NASDAQ +4.34% / +4.34%
10-yr Treasury 2.44% at the end of December and 2.45% at the end of January
Source: Bloomberg.com

February 2017

Index Month / Year to Date
Dow Jones +5.15% / +5.80%
S&P 500 +3.96% / +5.93%
NASDAQ +3.90% / +8.42%
10-yr Treasury 2.45% at the end of January and 2.39% at the end of February
Source: Bloomberg.com


Throughout January and February, Donald Trump continued to talk up spending and talk down taxes, and the equity market loved it! The markets have taken Trump at his word, and all of this “expected” fiscal spending and investment in economic growth has been driving the markets to record highs. The caveat is simply: how will he pay for it?

If there isn’t a net increase in tax revenue from someplace, then it would seem that he is proposing to materially increase U.S. debt, which is something his own party might not approve of once a bill is proposed in Congress. In essence, then, the stock market has been hitting record highs based almost entirely on hope and optimism that Trump will be able to make good on his promises. However, not only has no real impact from his economic plan been felt, most of the details about those policies remain unknown—and their actual implementation could be a process that faces many challenges.

This means that Trump’s perceived value has already been priced into the markets, even before he’s delivered any real value. In truth, with the Dow having surpassed the historic 21,000 point on March 1 and with the S&P 500 and Nasdaq also at record highs, the sky-high markets are irrational and overinflated. This is especially true with stock values being out of whack with current corporate growth rates, and they’ve been trending that way since the election. That trend may continue for a while either until Wall Street sees real evidence that Trump’s goal of 4% annual growth is coming to fruition (even so, the markets probably won’t go much higher because they’ve already priced in Trump’s impact), or until Wall Street sees evidence that his efforts might fail. The latter could potentially turn all that optimism into pessimism.

All of this presents challenges for fixed-income investors and makes active management more important than ever. If this new administration does end up spending large amounts of capital without balancing the budget, the Federal Reserve will likely increase interest rates, potentially a considerable amount. While this may not sit well with fixed-income investors, it does present the opportunity to reinvest into higher yielding securities.

This is one reason we continue to advise steering clear of bond funds in favor of individual bonds with short to medium maturities. Shorter maturity bonds pay less but have lower interest rate risks than do longer dated bonds which is why we keep short to medium maturity bonds in our portfolios. Ultimately, given our lower risk and lower turnover style of investing, we may not have much capital appreciation in 2017, much like 2016, but we should be able to maintain close to our 5% annual income levels.*

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