Trump and Circumstance: Winter 2017 Commentary

As we reflect on 2016, we consider an unusual event that most of us thought we would never see: the Chicago Cubs winning the World Series. However, Donald Trump’s election as President of the United States seemed just as unlikely during most of 2016. Britain’s exit from the EU is another unlikely event that shook the markets. While (as investors) we are apolitical, it is appropriate to consider what effects these seemingly seismic events will have on the investor’s tectonic plates: stocks, bonds and currencies.

The U.S. stock market, as measured by S&P 500 Total Return, enjoyed a healthy return for the year of approximately +12%. The U.S. Market has been roaring since the Republicans’ victory in early November, puzzling when you consider President-elect Trump’s protectionist stance and meddlesome rhetoric. What is the market signaling? To us, it is discounting lower corporate tax rates, a friendlier regulatory climate for business and increased government spending on infrastructure projects. When the Fed raised interest rates in December, stocks registered only the slightest discomfort.

Certainly, if it arrives, the fiscal stimulus afforded by tax cuts and government spending could boost economic growth and corporate profits for a while. The election, however, did not repeal the U.S.’s long-term challenges of high government deficits or an aging population. Checked by a Republican Congress, we can imagine that Trump’s action on trade will be less disruptive than his campaign promised.

Bonds had a challenging time since the election, paring gains for the year as rates rose. For the year bonds had a modest return of +2.7% as measured by the Bloomberg Barclays U.S. Aggregate Bond Index. With the economy nearing full employment and fiscal stimulus apparently on the way, the Fed has few reasons to continue the extremely loose monetary regime it began over 8 years ago. We expect an incrementally more “hawkish” Fed. However, there is a small risk they will find themselves “behind the curve”, where signs of future inflation begin to build faster than expected, causing them to raise rates quickly to quell incipient price increases and potentially cutting the economic expansion short.

The U.S. dollar seems set to rise against the Euro and the Japanese Yen as foreign governing banks seem set on continuing their “easy money” policy of recent years. A strong dollar will penalize the earnings of U.S. multinationals and put pressure on the dollar denominated debt of certain already-stressed emerging economies.

Being mindful of the opportunities and the risks in the markets, we counsel a slightly defensive investment posture. Fairly valued U.S. stocks should be at benchmark or slightly below, mildly emphasizing traditionally defensive sectors and technology. Europe and Japan equity markets are more attractively valued than the U.S. and warrant a full weighting within a diversified portfolio. Bond exposure should remain higher in credit quality, lower in duration than the benchmark. Alternative exposure should be maintained as a source of diversification and potential hedge against a rise in inflation.

One housekeeping item within the reports: we have updated the REIT index presented for blended benchmarks for the Alternative asset category and Real Return asset class. Specifically, we have replaced the Dow Jones US Select REIT Index with the S&P Global REIT Index. Updating the REIT index will better reflect our strategic allocation to global REITs and performance reporting for the Alternative portion of the portfolios. The weighting of the respective indexes comprising the Alternative asset category blended benchmark (30% Bloomberg Commodity Index/30% S&P Global REIT Index /40% T-Bill) and Real Return asset class blended benchmark (50% Bloomberg Commodity Index/50% S&P Global REIT Index) will remain the same.

In closing, we appreciate your trust and partnership with Altavista and look forward to meeting in the New Year to discuss your portfolio positioning and planning goals.

The Altavista Investment Team – Winter 2016

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