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Broker Check

January 27, 2017

The Markets

Markets weren’t quite sure which direction to move last week.

 The Trump rally, which lost some steam, gained momentum early in the week. The Standard & Poor’s 500 Index finished January 19, the day before the inauguration, with its biggest election-to-inauguration gain since Bill Clinton won a second term in 1996, according to MarketWatch, and the Dow Jones Industrial Average remained within striking distance of 20,000, according to Yahoo!Finance.

 On Friday, President Trump delivered his inauguration address, but it didn’t resolve the uncertainty that has been nagging investors. The speech mentioned infrastructure activity, brushed over stimulus spending and tax cuts, and leaned heavily into protectionism. Mr. Trump said:

 “America will start winning again, winning like never before. We will bring back our jobs. We will bring back our borders. We will bring back our wealth. And we will bring back our dreams. We will build new roads, and highways, and bridges, and airports, and tunnels, and railways all across our wonderful nation. We will get our people off of welfare and back to work – rebuilding our country with American hands and American labor. We will follow two simple rules; buy American and hire American.”

 The market response to Friday’s speech was subdued, according to Financial Times:

 “…with U.S. stocks edging higher, Treasuries putting in mixed performances and the dollar easing back against its main rivals. Oil prices rose sharply amid hopes that producers would show compliance to a global deal to cut output. Gold initially struggled for traction but held above the $1,200 an ounce mark.”

 All major U.S. stock markets finished the week slightly lower, and 10-year Treasury yields finished the week slightly higher.

 THOUGHTS FROM THE JIM GOODLAND TEAM AT GPS

 GPS did make the “Trump Trade” in many accounts last year focusing on infrastructure, rising rate friendly fixed income, financials and more.  It is still our belief that the stock market is in overvalued territory though it could continue to grind higher as the new administration policies are initiated which could cause some enthusiasm in the stock market.  That said, according to CNBC we are in the midst of one of the longest periods ever without a 20%+ market correction. Having a mainly goals-based philosophy – meaning we position portfolios to achieve goals rather than track the market – goals based portfolios are designed to avoid significant drawdowns and take advantage of dislocations in the marketplace.  As an example, in January and February of 2016, US stocks lost about 11% according to Yahoo!  During this decline some of our risk thresholds were violated so we did raise cash in many accounts.  We did put much of that cash to work in February though the swiftness of decline and then rise in the stock market caused a slight “whip-saw” as the timing of the reinvestment of the sales in January wasn’t “perfect.”  The new positions we initiated in February have done very well according to Morningstar and our portfolios are not based on “timing”, they are based on avoiding significant drawdowns, providing income, especially for our retired clients and keeping our clients “out of trouble” and achieving their goals.

New to GPS is we have targeted several investment management firms with unique philosophies, good track records and management as well as good results according to Morningstar and Envestnet.  We will be discussing these opportunities on an individual basis with our clients at an upcoming meeting.

So where do we go from here?  We see 3 basic scenarios with a 4th possible:

  1. Grind ahead. With the market somewhat excited about the Trump administration’s policies we could see the market grind higher over the next few months.  If earnings do not follow this trend quick enough this could be a short lived rally.  Longer-term, it always comes down to valuations and earnings in the stock market. If it takes longer than the market expects for Trump to initiate his agenda the market could get spooked and the rally could fade.
  2. Pull-back. The market is due for a pull-back.  The question is, will it be the pull-back that leads to something more significant or will it be another pull-back followed by a snap back rally?  New for 2017 is a “pull-back” strategy where we have back tested adding equities on pull backs of 4 and 9%.  We are not using 5 and 10% as there are so many automated trades at those levels that the little gals and guys miss out on some of the rally as their trades are not executed as quickly.  By using 4% and 9% we can ride the coattails of the high frequency people once they start buying at dips of 5 and 10% and drive the market up..  2017 is a year to take very seriously.  While things seem smooth now with the Trump policies there are still a lot of underlying risks that may not be avoidable.
  3. Granted we don’t see this on the table as of yet but investors rarely due.  With issues in Europe, China and the tremendous amount of debt and leverage it is only a matter of time before we have a recession.  If this were the case, with a market already overvalued the shocks to the market could be large.  Therefore, we continue to have positions in most portfolios that would add as shock absorbers as well as our risk scenarios for reducing risk when the market’s get spooked.
  4. A global bear market. We don’t make economic forecasts though the analysts we follow are all starting to get a little nervous.  We will have more on this next week.

TREMENDOUS. Awe-inspiring. Groundbreaking. OVERWHELMING. Those were just a few of the adjectives used to describe 2017’s Consumer Electronics Show (CES), which showcased all kinds of new technology. This year, gadgets and gizmos included wall-sized televisions that are as thin as house keys, computers that scan 2D and 3D objects, and beds that read biometric clues to warm your feet and reduce snoring. Here are a few notable trends that captured media attention:

Smart cars. Black Enterprise reported, “If there was one, star attraction at CES this year, arguably it was vehicles…Artificial intelligence is the power behind the new crop of autonomous, assistive vehicles. These cars not only self-drive, they can read your emotions, make snap decisions in the presence of danger on the road, and can even tell you about the flora and fauna at your destination site.”

Smarter homes. CNET Magazine wrote, “For…years, we've been saying the "real" smart home is just around the corner. But at CES 2017, it finally felt more tangible than ever before…Whether it's lighting, DVRs, refrigerators, robot vacuums, home security systems, phones, or cars – to name just a few – the list of stuff you'll be able to interact with…is set to explode in the coming months. And with such networked integration now becoming the rule rather than the exception in major appliances…there's no turning back.”

Even smarter routers. Popular Science liked a new Wi-Fi router that “…rather than protecting each of your devices individually…will use…software to protect up to 20 laptops, computers, tablets, or smartphones – and an unlimited number of IoT devices – in one fell swoop…You'll be able to monitor…all devices connected to the router, through a smartphone app…You can even tell the router to turn off internet access to certain devices – or devices linked to a particular profile – at certain times. So, you can make sure little Johnny isn't up all night watching YouTube videos on any of his devices (except for his phone, maybe, but that's your own dang fault for getting the kid a data plan).”

Of course, trends in technology are just one American story. Another trend, in some states, is the growing popularity of rural, sustainable, off-the-grid properties, according to NPR. “Despite the remoteness of these homes, they're not backwoods shacks with sagging metal roofs. Some… listings sell for more than $1 million if there's a lot of land and if water rights are included. The one with the helicopter pad is a spiffy, two-story log home with a wraparound porch.”

Weekly Focus – Think About It

“When I dare to be powerful, to use my strength in the service of my vision, then it becomes less and less important whether I am afraid.”

--Audre Lorde, African American writer

Best regards,

The Jim Goodland Team at GPS

P.S.  Please feel free to forward this commentary to family, friends, or colleagues. If you would like us to add them to the list, please reply to this e-mail with their e-mail address and we will ask for their permission to be added.

 

 

* Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.  However, the value of fund shares is not guaranteed and will fluctuate.

* Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest rate and credit risk as well as additional risks based on the quality of issuer coupon rate, price, yield, maturity, and redemption features.

* The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. You cannot invest directly in this index.

* All indices referenced are unmanaged. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.

* The Dow Jones Global ex-U.S. Index covers approximately 95% of the market capitalization of the 45 developed and emerging countries included in the Index.

* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.

* Gold represents the afternoon gold price as reported by the London Bullion Market Association. The gold price is set twice daily by the London Gold Fixing Company at 10:30 and 15:00 and is expressed in U.S. dollars per fine troy ounce.

* The Bloomberg Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.

* The DJ Equity All REIT Total Return Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.

* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.

* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

* Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

* Past performance does not guarantee future results. Investing involves risk, including loss of principal.

* You cannot invest directly in an index.

* Consult your financial professional before making any investment decision.

* Stock investing involves risk including loss of principal.

Sources:

http://www.marketwatch.com/story/how-the-trump-rally-stacks-up-to-other-postelection-stock-market-gains-2017-01-18

https://finance.yahoo.com/quote/^DJI?p=^DJI

https://www.washingtonpost.com/news/the-fix/wp/2017/01/20/donald-trumps-full-inauguration-speech-transcript-annotated/?utm_term=.5e618d7a29fd

https://www.ft.com/content/fe66322a-deb8-11e6-86ac-f253db7791c6 (or go to https://s3-us-west-2.amazonaws.com/peakcontent/+Peak+Commentary/01-23-17_FinancialTimes-Markets_Give_Muted_Response_to_Trump_Speech-Footnote_4.pdf)

http://blogs.barrons.com/stockstowatchtoday/2017/01/20/condemned-to-hope-dow-dips-0-3-this-week-as-market-waits-for-trump-revival/?mod=BOL_hp_blog_stw

https://finance.yahoo.com/quote/%5ETNX/history?p=%5ETNX

http://www.forbes.com/sites/johnarcher/2017/01/04/lg-unveils-stunning-new-oled-tv-range-including-jaw-dropping-wallpaper-design/#538766222c05

https://www.cnet.com/products/hp-sprout-pro-g2/preview/

https://www.cnet.com/products/sleep-number-360-smart-bed/preview/

http://www.blackenterprise.com/technology/ces-2017-incredibly-smart-cars/

https://www.cnet.com/news/ces-2017-the-final-word/

http://www.popsci.com/most-exciting-tech-at-ces-2017-are-wi-fi-routers

http://www.npr.org/2016/04/28/474673707/in-the-rural-northwest-a-growing-market-for-survivalist-homes

https://www.globalfundforwomen.org/wp-content/uploads/2015/09/audre-lorde.jpg


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