The domestic large-cap equity market, as depicted by the Standard & Poor’s (S&P) 500, reached a record high last week as comments from President Trump may have attributed to the upside optimism. While meeting with various airline executives late last week, the president announced that a “phenomenal tax break” would soon be announced and it would not only help “all businesses in the U.S.”, but it may be especially beneficial for airlines. The exact details of what this new tax plan entails remains puzzling given that earlier campaign promises indicated a tax break for smaller companies, not necessarily for those worth north of $20 billion. Irrespective of what policies are announced, however, we remain cautious on the influence that the White House has produced on equity markets and believe that the risks associated with such rhetoric may produce increased company specific risk. An objective risk management process becomes an even more crucial component of portfolio management in such a scenario.
One of the main things that the White House would like to accomplish by upcoming fiscal policy measures (such as lowering taxes) is to reduce the trade gap, which can be measured by net exports (referring to the amount we export relative to the amount we import). Data released during the week indicated that we imported approximately $44 billion more than we exported in December 2016, a figure that the White House would like to cut in half over the medium-term (Bloomberg). To place that figure in perspective, the last time that net exports were below $1 billion was in February 1992. It is not an easy task to accomplish and the effects to the U.S. dollar may derail any possibility. The dollar rose approximately 1% last week and continues to remain elevated. The overall effect to global equity markets from a stronger dollar remains ambiguous at the moment because no definitive action plan has been announced. Our internal belief is that near-term volatility may be possible and we have positioned ourselves to take immediate advantaged of any downside we experience. It’s important to note that the Standard & Poor’s (S&P) 500 is on a 39-day streak without a positive, or negative, 1% move. That’s the longest streak in almost two decades (Bloomberg).
In other economic news during the week, we learned that the labor market continued to post positive gains. The Fed’s Labor Market Conditions Index for January was announced better than had been anticipated after bottoming in early 2016. Job creation has been positive over the past five years but we do remain cautious on the trend that has been established over the recent past. In our ‘View of 2017’ analysis, which is available on our website, we made reference to a labor market that may be normalizing in 2017 – or at least one that we believe to be normalizing. Full employment seems almost inevitable based on current payroll data and we would be encouraged to see a labor market that posts average figures. To us, this implies stronger competition for skilled labor which may translate to higher annualized wage growth, a component of the labor market we’re highly optimistic on.
Internationally, comments from Mario Draghi, the President of the European Central Bank (ECB), indicated the region’s disapproval of President Trump’s efforts to deregulate “crucial components of the financial system.” If such deregulation were to occur domestically, European domiciled banks may stand to lose due to potential capital outflow to less regulated financial markets.
Investment advice offered through Hefty Wealth Partners, a registered investment advisor.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. The economic forecasts set forth in the presentation may not develop as predicted.
Investment Policy Committee