In January, it will be 70 years since the first microwave oven was made available for public use. While the first microwave ovens pale in comparison to their modern day counterparts in size, cost and efficiency, it’s invention has had a dramatic impact on culture. Prior to the invention of the microwave oven, food was prepared in a slow and methodical process that often took several hours. It sped up the process by being able to prepare food in fractions of the time.
We find that the microwave oven is a good illustration of how we all place a high degree of importance on immediate gratification. Waiting for anything has become less tolerable. We demand that everything happens quickly: food arrives fast; e-mails must be returned in a manner of minutes; waiting in lines is almost unthinkable. Sound familiar?
This serves as a gentle reminder that good things come through proper planning and a methodical, patient process. Just as a good home cooked meal takes longer than a microwaved dinner, a prudent investment philosophy is rewarded over the long haul. We’d encourage our clients to take a long-term view of their financial goals and objectives.
Q3 2016 Economic / Market Recap
Over the last two years (2014 & 2015), the 3rd Quarter has offered some dramatic market moves, but produced meager results. That streak was broken in 2016, as the S&P 500 returned 3.3% from July through September. For the year, the S&P 500 is up a little over 6%. Developed International Markets (i.e., Europe, Japan, Hong Kong, etc.) also righted the ship from the UK June Referendum (Brexit) and finished the quarter up 5%, but are still down about 1.5% for all of 2016. Emerging Markets were the true race horse during the 3rd Quarter. They were up about 8% over the last three months and up a strong 14+% so far in 2016. As a whole, Global Markets (as measured by the MSCI All Country World Index) are up 4% for 2016.
The bond market continues to show its resilience despite seemingly endless commentary on a bond bubble and interest rate hikes. Although, the US Bond Market was essentially flat in the 3rd Quarter, it is up almost 6% in 2016. When the Federal Reserve hikes rates again, it would be logical that some bonds may suffer. We continue to believe, however, that bonds do continue to have a place in most clients’ accounts. The volatility in the bond market historically is substantially less than that of stocks. Simply meaning, a “bad” bond market is not the same thing historically as a “bad” stock market.
Q4 2016 Outlook
The 4th Quarter has the potential to have multiple news worthy headlines and events.
November Elections Impact on Markets and Economy
The most obvious headline will be the 2016 Presidential election. As we have seen so far, this cycle has been extremely nasty and, to many, disappointing. A common question seems to be, “are these two the best that America has to offer?” While we are not political prognosticators, we can offer a dramatic prediction—either Donald Trump or Hillary Clinton will become President!
We can assume if Clinton gets elected, we will have more of the same that we have had over the last 8 years.
The economy has not been as robust as we would like it to be. It has definitely been a “plow horse economy” as opposed to a “race horse economy”.
What’s going on—why is the economy not more robust? The rate of real economic growth as measured by the gross domestic product (GDP) is the single greatest determinate of our strength as a nation and the well-being of the economy. If the US economy does not grow at least by 3% in 2016, President Obama’s presidency will be the first since the Great Depression that the US economy did not grow by at least 3% during at least one year of a president’s term.
Austan Goolsbee, former Chairman of President Obama’s Council of Economic Advisors, was interviewed recently by Paul Gigot on Fox News and asked about slow economic growth. He argued that “a lack of aggregate demand” in the U.S. is reducing business investment and slowing economic growth. Aggregate demand is economic code for “spending.” Politicians, of course, love to blame a weak economy on a lack of spending. After all, if the economy is weak, all government leaders have to do is increase the size of government and its spending! Of course, the amount of government spending is up dramatically over the last 8 years.
We can find no evidence to support this argument. Every dime of government spending is either taxed or borrowed from the private sector. And it is this spending, this taxation and deficit spending, that crowds out the private sector, preventing it from growing and creating wealth. We believe if the U.S. goal is to promote a growth economy, then government spending must be reduced.
What can we expect from Donald Trump? Many “experts” would say uncertainty. He has laid out a plan to achieve 3%+ GDP growth, to reduce federal income taxes on all taxpayers, and to reduce spending. From our viewpoint, at least he is talking about the right things. If elected, whether or not he can get Congress to enact that agenda remains to be seen.
This election will prove to be historic in numerous ways. The economy and financial markets don’t seem to care today who is elected—eventually that will change as the new President’s policies are enacted and the effects (either positive or negative) are realized.
Interest Rate Hike
The other likely dominant headline over the next three months will be anticipated interest rate hike from the Federal Reserve. We would anticipate that the Federal Reserve votes to increase short-term interest rates by 0.25% at their December meeting. Current, probability suggests a 75% chance of a rate hike. As we have written countless times, markets may throw a bit of a short lived hissy fit over this as the FED continues to take away the financial markets favorite toy. However, we would suggest that an interest rate hike is both prudent and warranted.
Interest rate policy is the primary weapon in the Federal Reserve’s war chest to combat economic decline and expansion. In our opinion, the thing that the Federal Reserve is trying to avoid is either having to increase rates too quickly to control an overheating economy or having little to no ammunition to counter the next economic recession. We would support a slow and gradual interest rate hiking strategy.
In addition, an interest rate hike would suggest that the economic recovery, while slow, is on solid footing. Investors should view that in a positive light. However, each time the Federal Reserve has either hinted at becoming less accommodating markets have reacted negatively. Time will tell if Janet Yellen and her Federal Reserve friends have the stomach and political backing to continue to do what the economic data suggests they should.
Finally, we’d like to share a couple of office updates with everyone.
First, after 5 months, we have completed our broker-dealer change back to First Heartland Capital. We are very pleased with our decision to affiliate with them again. They have been very supportive in our efforts to get our large number of clients repapered.
Second, we’d like to announce the addition of a new advisor in our office, Shelton Tate. He was an attorney working with US Trust in Atlanta prior to his arrival at our firm. He is from Spartanburg and attended Auburn University where he was Aubie (their mascot) during his senior year. We are excited and pleased to have Shelton on board!
We continue to preach the same message that financial, retirement, and estate planning is a marathon and not a sprint. No one has a crystal ball, but it seems pretty clear that financial markets will both go up and go down! A victory by either Trump or Clinton is not likely to cause an immediately recession. Likewise, interest rates being ¼ percent higher will not devastate our economy. We think it is smart to be tactical in our approach to short term volatility, but calculating and patient in our long range planning.
Thank you for your continued business. We look forward to talking with you soon.
We hope that everyone has a great Fall!