Another take on issues impacting financial markets
We thought it would be beneficial for the readers to change up the column a bit to address more of the broader issues impacting the financial markets and investors. With the format below, it is possible to provide information and insight on a more timely fashion with the intent of helping you reach more informed decisions regarding your financial future. That said, we welcome your comments at www.faganasset.com.
• Trump’s Tax Package. Let’s not become all partisan right at the get- go and give this a bit of a chance to play out in Congress. However, as proposed the main pieces of the package include three tax brackets rather than seven, a doubling of the standard deduction for individuals, an elimination of the state and local income tax deductions on your federal return and lower corporate taxes.
If enacted as proposed, the economy will most likely accelerate at least temporarily resulting in higher corporate profits ( bullish for investors) accompanied by a more hawkish Fed ( bearish for investors). This battle between the two forces will be interesting to watch.
Anecdotally over the more than twenty- eight years we have been in business we have noticed that bull markets have been characterized by a slow grind higher over time ( months) amidst little or no earthshattering news with intermittent nasty selloffs. On the other hand, bear markets have been characterized by a slow grind lower over time ( months) with intermittent earthshattering news that causes substantial bounces higher. The former is what investors have experienced over the past few trading days with the NASDAQ • Composite. For the five trading days prior to this past Wednesday the NASDAQ Composite rose or fell less than 0.10%. However, on Wednesday it fell 0.88% -- a slow grind higher with an intermittent nasty selloff. This index has subsequently moved higher. We believe we are in a bull market and investors should position themselves as such.
• Track and field – the mile race. We liken the progression of bear and bull markets to the mile race which is four laps around a one- quarter mile track. The conclusion of a bear market is often characterized by a sharpmove upward. During the last bear market, the one that ended on March 9, 2009 the S& P 500 fell more than fifty percent. However, in just three months following this date, that index rose nearly forty percent. Call this the first lap, the fastest one out of the gate, a full sprint. During the second and third laps the runners settle down to a sustainable pace. Although nobody knows for certain, let’s assume that these two laps concluded on the day President Trump was elected, November 8, 2016. Over this period of time ( June 30, 2009 – November 7, 2016) the S& P rose by an average of 12.11% per year. However, since that date the S& P 500 has risen 17.62% indicating to us that the runners ( investors) have picked up the pace and entered the fourth lap. Where we are in this fourth lap is anybody’s guess. This fourth lap is often characterized by investor euphoria accompanied by a parabolic break higher. We believe that we are early in this lap because even though returns have accelerated somewhat, there has not been a parabolic move higher nor has investor sentiment become euphoric. Must this necessarily occur before then end of the bull? Certainly not. However, some event must take place to permanently change its direction and thus far nothing materially has developed.
Inflation is all about shortages of supply which result in bottlenecks. This can occur with materials, services or labor. Thus far we have seen little or no shortages in any of these areas as wholesale inflation remains subdued as does wage growth. It is the job of the Fed to move interest rates higher in anticipation of inflation. We believe that the Fed should be in no hurry to do so as deflationary forces resulting from technological advances as well as global competition remain strong. For fixed income investors this means purchasing bonds or bond funds that have average credit quality and intermediate durations.
Please note that all data is for general information purposes only and not meant as specific recommendations.
The opinions of the authors are not a recommendation to buy or sell the stock, bond market or any security contained therein. Securities contain risks and fluctuations in principal will occur. Please research any investment thoroughly prior to committing money or consult with your financial advisor. Please note that Fagan Associates, Inc. or related persons buy or sell for itself securities that it also recommends to clients. Consult with your financial advisor prior to making any changes to your portfolio. To contact Fagan Associates, Please call 518- 279- 1044.