Winter 2017 Quarterly Commentary

Risks are elevated and very much dependent on execution out of Washington D.C.! That thought alone has our mood glass-half-empty!! So, we will continue to ignore the noise and focus on the handful of mega trend growth areas of our economy – investing only in those companies we believe can be the leaders of tomorrow. We have confidence that our targeted approach is well-suited for an increasingly volatile yet constructive stock market in 2017.

Positive Economy/Business Outlooks

Animal spirits are alive and well – Post-election consumer confidence has continued its ascent led by expectations jumping to a 13-year high. Economic growth projections have risen with confidence and 2017 looks encouraging.

If you build it…! If you look around, cranes and construction machinery are just about everywhere. U.S. construction spending recently hit $1.18 trillion in November – its highest level in 10.5 years.

Show me the money! While non-farm payroll growth has been impressive the past few years, naysayers have pointed to a lack of average hourly earnings growth. This is changing as the most recent report showed 2.9% year-over-year growth.

Negative Economy/Business Outlooks

Bye-bye brick and mortar? Ex-internet sales, retail sales have been a big disappointment – especially at big box retailers like Macy’s and Kohls. If you exclude auto & gasoline sales, December retail sales were unchanged from last year.

Will rising rates stall housing market? Stronger growth will result in rising rates toward more normal levels. We expect that this will moderate or slow housing demand. Millennial demand will need to offset this anticipated headwind.

The Trump Effect – as a whole, we believe the new administration will be much more pro-business than in year’s past. However, tweets targeted at businesses and industries can have unintended negative consequences.

Negative Financial Markets Outlooks

Market priced for perfection? historically-speaking, the current market p/e ratio is not exactly inexpensive. If corporate earnings do not accelerate as expected and/or if Trump’s policies are delayed / do not occur, the market could sell off.

Slower & lower rates, please! With rising short rates (due to fed rate hikes) and long rates (stronger economy) expected, our debt-laden public & private sectors will experience increased borrowing costs which could slow GDP growth.

How long is the honeymoon period? Proposed policy changes by the new administration have been well-received. We wonder how long euphoria & optimism will last before being replaced by accountability & pessimism?

Positive Financial Markets Outlooks

Fundamental catch-up time? Earnings growth is finally accelerating – from +4% last quarter to +6% expected this quarter to +13% expected next quarter! Headwinds experienced by the energy sector in 2016 will become a tailwind this year.

Government policy Trump card? Pre-election market jitters have been replaced by optimism and excitement. Pro-business cabinet nominations as well as potential deregulation, tax reform and fiscal stimulus have propelled the recent advance.

Follow the money! Stronger economic growth projections have lifted yields and in turn have hurt bond investments. As a result, investor allocations have shifted back toward stocks – reversing the money flow bias to bonds in 2016.


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