2017 was a tremendous transition year for Optivest. We added industry veteran Bart Zandbergen, CFP® as Senior Wealth Advisor and Stella Choi, CFA®, CFP® as Director of Portfolio Management who was responsible for implementing our successful risk-based model portfolios for Optivest clients. As 2018 commences, we continue to refine our portfolio models and upgrade our different portfolio software systems to enhance our management and reporting capabilities.
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.
November 1, 2017
Are we at the top yet? Selling near stock market highs and locking in profits is always tempting, especially when the current bull market is one of the longest on record and seemingly puttering out. Yes, this might be the perfect time to sell, however, let’s look at the long term odds first.
According to Check Capital’s research, the Standard & Poor’s 500 Index (S&P 500) has advanced in 78% of the years since 1950 (or about 4 out of every 5 years). Further, 95% of every five years – and 100% of each decade – since 1950 have led to a new high. These statistics are true even though the S&P 500 has had an average of 14.2% annual peak to trough dips. Volatility is normal. While the average S&P 500 annual return has been about 10%, annual returns in the 5% – 15% range surprisingly only happen about 20% of the time so expect big price swings. If your investment time horizon is longer than a few years, betting against these odds is dangerous. But sitting through another multi-year decline is equally unsavory. What to do, then?
August 2017: Optivest Wealth Management’s affiliate Optivest Investment Banking (OIB) announced on August 23, 2017 the acquisition of their client, TravisMathew, LLC, by Calaway Golf Company for $125.5 million in an all cash transaction. OIB acted as financial advisor to TravisMathew.
TravisMathew, founded in 2007, has grown into an iconic men’s sportswear brand with superior domestic distribution in premier department stores, high-end country clubs, resorts and TravisMathew retail stores. TravisMathew draws its inspiration from all aspects of Southern California culture and lifestyle combined with a focus on constant innovation and extraordinary quality.
Callaway Golf Company creates products designed to make every golfer a better golfer. The company both manufactures and sells golf clubs and golf balls, sells bags and apparel in golf and lifestyle categories under the Callaway Golf, Odyssey and OGIO brands worldwide.
The team at OIB led by Paul Donnelly, Sr. Managing Director, provided advisory services to the owners of TravisMathew and its team of advisors which included structuring and negotiating the transaction on behalf of the Company.
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.
January 6, 2017: 1Q2017 Economic Update
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.
The Volatile Path Back to “Old Normal”
After 2 weeks of absorbing the U.S. election results, watching the financial markets and reading countless market and economic commentaries, we offer the following condensed thoughts.
What was Expected?
While the election was thought to be close, the odds makers and thus the financial markets were clearly expecting a Clinton victory. That meant continued heavy entitlements, higher taxes, very low GDP growth, low inflation and a decent chance of a recession in 2017. All of this led to ultra-low interest rates and a relatively high stock market based on no real alternatives for positive risk based returns.
But Trump won. Now if, and a big if, Trump’s Republican-led houses get their way, we will see lower taxes (lower personal and corporate taxes and no 3.8% Obamacare tax), less regulation and all manner of fiscal stimulus that has so far been absent in our weak recovery over the last eight years. This would lead to higher GDP, higher wages, no recession and eventually higher inflation. The new premise is that we are headed back to the “old normal” of 3-4% GDP, 3%+ 10 year government bonds and higher corporate growth rates. Therefore, valuations multiples would also “normalize” with lower P/E ratios and higher cap rates for real estate.
Financial Markets Review by Mark:
U.S. and World Economy –
The calm before the storm. Developed world financial markets (U.S., Japan and Europe) have become numb to the long-term effects of unprecedented monetary stimulus. The companies in the S&P500 are now reporting their 6th quarterly drop in revenue and 4th quarterly drop in corporate profits. The labor recovery peaked 8 months ago (job openings and unemployment) as weak hiring is catching up to weak GDP growth. After a 1% revised first half U.S. GDP growth, the second half of the year was supposed to bounce back – it has not. Yet both stock and bond markets remain near all-time highs amidst very low (by historic standards) volatility. The developed world stock markets have benefited from very low cost borrowing to facilitate share buy-backs, artificially creating higher earnings per share; bonds have benefited from Central Bank buy-backs as well.
However, these monetary maneuvers may have peaked this summer. Since then, interest rates have moved higher and the stocks which moved highest the first half of the year have dropped the most in the second half (REITs, utilities, tech). In addition, near-term election cycles here and in Europe have raised the voice of nationalism, border and trade protection. There is talk of “Italeave” ala “Brexit”. We believe that the next major downturn will start in Europe where low and negative interest rates have pulled business forward as much as possible, bringing the weak economic expansion to an earlier than expected close. Initially, the U.S. will be the beneficiary of a flight to quality, but a stronger Dollar set against a falling Yen and Euro will hurt our exports and lead to our own recession.