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2017 Newsletters

U.S. & World Economy by Mark:

Irrespective of the news “noise” and saber rattling, the fuse has been lit for the “Trump Trade” once again. Over the last 4 – 6 weeks U.S. focused stocks, interest rates and the U.S. Dollar have all surged from the doldrums. As we head into the historically volatile month of October, the U.S. economy is finally achieving a 3% GDP growth rate (second quarter revised) and the financial markets are strong. Hopes are gaining for a Federal Government tax reform, which comes at a good time for us Californians who have the highest state income tax, sales tax, gas tax and vehicle tax in the country (according to the Orange County Register). However, our ability to offset these taxes against our federal taxes will be a major battle. As we wrote in our January 2017 newsletter, we believe lower taxes will again help GDP growth and, surprisingly, help with Federal Government deficits as they have done in the past.

While inflation has stubbornly remained below the 2% Fed target, interest rates have started moving upwards in anticipation based on our low unemployment level, increased GDP, pro-business agenda, hopes of tax reform, and the impact of the Fed starting to sell off their $4 trillion holdings. Time will tell if this is the start of a multi-year trend or another false start. 

U.S. & World Economy by Mark:

Economy: The Trump “sugar rush” is over, yet we have landed on an economic sweet spot for inflation (approximately 2%). This combined with modest worldwide GDP growth, near full employment, and cautious hope on tax reform has lead global financial markets (both stocks and bonds) to end the first 6 months of 2017 with near YTD highs. Surprisingly, we’re also in a climate of lower volatility than one would have expected – the lowest in 50+ years according to Wall Street Journal – given the drama highlighted by the “news” and the media. However, first half of the year bets on higher inflation and domestic company growth have gone unrewarded as commodities (led by oil), managed futures, and small cap stocks have all underperformed this year so far.

By year-end we suspect that this current economic balancing act will have selected a specific direction: either there will be a belief that pro U.S. business policies will start (and work) and inflation/higher interest rates will resume; or hopes will peter out and our flattening yield curve (combined with high valuations) will lead to the next downturn in the economy and financial markets. We are not willing to make that “all or nothing” market call and thus we remain well balanced and positioned to accept either outcome.


U.S. & World Economy by Mark:

While the upticks in both U.S. sentiment and the stock market are in part a reflection of the optimism over President Trump’s pro-growth plans, there is more to the story. The other main contributor is the collective recognition that we finally have a moderately growing global economy with few weak spots. The U.S. was the cause of the global financial crisis of 2008, the first to bottom and the longest to recover. The rest of the world’s GDP expansion has been years shorter and is still catching up to our higher valuations. Secondly, after five quarters of Wall Street corporate profits dropping (the last quarter was 3Q2016), the first and second quarters of 2017 look positive with a deliberate buildup of inventories on optimism. However, that is largely behind us now as the financial markets often project six months or more in advance. The failure to address Obamacare – even with a Republican majority – makes the rest of Trump’s business-friendly agenda much less certain leaving global growth as the remaining reason for bullish optimism. We expect the markets’ sentiments have shifted from “tell me” to “show me” which will cause the financial markets to back and fill until the second half of 2017 becomes clearer.  

1Q2017 Economic Update
January 6, 2017: 1Q2017 Economic Update

Trump/Economy
A large part of Trump’s political capital will be used to rewrite the tax code to lower personal and corporate tax rates and limit deductions (besides replacing Obamacare, increasing infrastructure spending, rolling back excess government regulations and probably a little tightening on immigration and increased nationalism to give red meat to his constituents). Therefore, an initial assumption would be to expect lower tax receipts and rising government budget deficit after the proposed tax cuts.

However, upon reviewing the most recent large tax reductions in history (under President Kennedy, President Reagan and President Clinton specifically), it appears the opposite occurred. Under President Kennedy, tax revenues increased 62% from 1961 – 1968, unemployment went from 5.5% down to 3.9%, and the stock market doubled. Under President Reagan, tax revenues went up 99% throughout the 1980s, unemployment peaked at 10.8% in 1983 then dropped to about 5.8% in 1990, and the stock market tripled. Under President Clinton, tax cuts in 1997 led to a 59% gain in tax revenue, eventually producing a budget surplus of $198 billion by 2000, unemployment continued down from 5.8% to under 4%, and the stock market doubled from 1997 – 2000.

In all three of the above cases, citizens in the top income tax bracket felt an upsurge in their share of the tax burden (lower % but higher $) while real wages grew across the board. The heart of the problem is declining median income and this directly contributed to Trump’s popularity in the recent election. The average U.S. median income of $57,423.00 in 2007 dropped down to $53,718.00 by 2014 while the top 10% of income earners grew. It is Main Street’s hope to gain real wage increases again.