Joseph SchwSDWIA Bridgearz, CFA 612.355.4365

Stephen Dygos, CFP® 612.355.4364

Benjamin Wheeler, CFP® 612.355.4363

Paul Wilson 612.355.4366

www.sdwia.com

DECEMBER 2016
Market Update
(all values as of 06.30.2020)

Stock Indices:

Dow Jones25,812
S&P 5003,100
Nasdaq10,058

Bond Sector Yields:

2 Yr Treasury0.16%
10 Yr Treasury0.66%
10 Yr Municipal0.86%
High Yield6.81%

YTD Market Returns:

Dow Jones-9.55%
S&P 500-4.04%
Nasdaq12.11%
MSCI-EAFE-12.59%
MSCI-Europe-14.03%
MSCI-Pacific-10.25%
MSCI-Emg Mkt-10.73%
 
US Agg Bond6.13%
US Corp Bond5.03%
US Gov’t Bond7.20%

Commodity Prices:

Gold1,798
Silver18.55
Oil (WTI)39.61

Currencies:

Dollar / Euro1.12
Dollar / Pound1.23
Yen / Dollar107.39
Dollar / Canadian0.73
 

Macro Overview

A monumental shift occurred in November as consumer sentiment, interest rates, and equity markets all increased with growth expectations settling in. Infrastructure spending, manufacturing, a friendlier regulatory environment, trade agreements, and fiscal stimulus have become the primary objectives of the president-elect.

A shift towards fiscal stimulus, as proposed by the incoming administration, is expected to help ease the burden on the Federal Reserve. Fiscal stimulus creates higher wages and spending by means of lower taxes, eventually leading to inflationary pressures, which is one of the Fed’s objectives.

Equity markets rallied in November with the Dow Jones Industrial Index breaching the 19,000 level, a record high for the index. The Dow Jones Transportation Average climbed 11% for the month, it’s single largest monthly gain since October 2011. As a leading indicator of economic growth, strong gains in the transportation index are often indicative of improving economic conditions.

A byproduct of rising rates in November, stemming from optimistic economic growth forecasts, led to a considerably stronger U.S. dollar. The challenge for the new administration will be harnessing the dollar’s strength for U.S. imports, yet finding ways to make U.S. products affordable in the world marketplace.

OPEC agreed to cut oil production among its 13 members by 1.2 million barrels a day from the current 33.6 million barrels. The agreed upon reduction would reduce global output by about 1%, easing high levels of supplies and stabilize prices.

November saw an accelerating shift in assets from globalization related positions towards domestic related positions. The inflationary effects of economic growth have now replaced the deflationary concerns that lingered since the financial crisis of 2008.

Markets are closely watching Trump’s cabinet appointments since several of the appointments are instrumental in orchestrating the direction of various industries, taxes, regulations, and economic growth.

The economic climate is different now than it was during prior Republican administrations. When Reagan came into office in 1980, inflation was at 14% and the dollar was at a generational low. Heading into the inauguration, inflation is below 2% and the dollar is at a 13-year high, making dramatic economic improvements difficult to achieve.

Sources: Fed, OPEC, Reuters, BLS

 

Stock Indices Reach New Highs – Domestic Equity Overview

Many analysts believe that the stock market rally following Trump’s election reflects the expectations of a new era of fiscal stimulus. Both economists and analysts agree that the Fed has basically exhausted all of its stimulus efforts by means of using traditional and newly devised monetary policy tools that are now considered ineffective.

Small caps outperformed large caps following the election, primarily driven by the growth factors expected to benefit small cap stocks. Proposed corporate tax rate cuts also favor small caps, which benefit more than large caps from tax rate reductions. Proposed deregulation is good for small caps as large caps can handle higher costs of regulation easier than small caps, leaving small caps to benefit the most under deregulation.

Protectionism is expected to benefit small company stocks which typically generate less than 20% of their sales overseas while larger company stocks generate well over 30% from overseas sales. A reduction in the corporate tax rate to 15% would be much more beneficial for small company stocks, which generally don’t have the resources to bring tax rates below 35%.

The Dow Jones Industrial Average reached 19,000 in November, a milestone level for the index, which was at 1000 in November 1972. The Dow Jones Industrial Average rose 5.4% in November, while the S&P 500 Index increased by 3.4% and the Nasdaq Composite added 2.6% for the month. The Dow Jones Transportation Average climbed 11% in November, it’s single largest monthly gain since October 2011. As a leading indicator of economic growth, strong gains in the index are often a good sign for the U.S. economy.

Sources: S&P, Dow Jones, Bloomberg

Rates Heading Higher – Fixed Income Update

Bond markets reversed their long-term trend of descending yields as economic growth expectations and inflationary pressures mounted.

The anticipation of lower taxes sent demand for municipal bonds down. A primary reason for buying munis is the tax benefit of municipal interest, thus resulting in a drop in muni prices in November.

High-yield corporate bonds enjoyed a generous run up in November as optimism regarding economic growth and jobs tend to benefit high-yield bonds. High-yield bonds are issued by companies that are considered less credit worthy and more at risk for default. The same companies who issue these bonds tend to prosper in a growth environment, thus generating greater profitability and increasing the likelihood of paying their bond obligations.

The 10-year U.S. Treasury yield ended November at 2.37%, up from 1.87% before the election and 1.37% in July after Britain’s vote to exit the EU. Even as U.S. Treasuries have fallen in price during this yield increase, they are notably the highest yielding government bonds among developed countries. Such a disparity may attract new buyers in search of yield resulting in higher prices and yield constraint. The forces affecting the U.S. bond markets are global, as U.S. debt from various sectors look attractive yield wise as well as conservative relative to higher yielding emerging market debt.

Sources: Bloomberg, U.S. Treasury Dept.

 

U.S. Has Among Highest Corporate Tax Rates – Fiscal Policy Review

One of Trump’s fiscal proposals is to reduce the inherently high U.S. corporate tax rate from 35% to 15%. The United States currently has one of the highest corporate tax rates of any country worldwide at 35%. The average corporate rate globally is just over 23%.

Some countries maintain low tax rates or no corporate tax at all, such as Cayman Islands and Bermuda, in order to encourage companies to invest and hire within their countries. Some believe that if U.S. corporate tax rates drop, it might discourage U.S. companies from seeking tax havens overseas, such as tax inversions. Inversions occur when a U.S. company buys or merges with a foreign domiciled company in order to adopt a lower tax rate. A report released by the OECD raises a concern that some European countries are being used as tax havens, but with little or no benefits achieved by the underlying workforce or economy.

Source: OECD

Corp Inc Tax Rates-Basic Charts

 

What Imports Into The U.S. – Consumer Behavior

As the president-elect prepares to enter the White House, foreign imports into the U.S. have become a leading agenda item. According to the Commerce Department, the top imports into the U.S. include electronic devices such as mobile phones, computers and TVs, followed by machinery and automobiles. The onset of additional tariffs and import duties might change the makeup of imports dramatically, as consumers tackle higher prices along with some manufacturing possibly shifting to the U.S.

The biggest question everyone has is how will higher tariffs affect U.S. consumers and the economy. The most dominant imports currently tend to be high margin products such as mobile phones, laptops, and computers. Any additional tariffs might either be partially absorbed by the exporters or passed along to consumers in the form of higher prices. What’s interesting is that the onset of cheap Chinese made products have actually altered consumer behavior in the U.S. over the past twenty years. Before inexpensive TVs made their way into electronic superstores, a typical TV would last years. Today, TVs are considered disposable and easily replaced.

Should import prices rise, consumers might reconsider replacing products regularly, and instead maintain existing products for longer periods.

Source: Dept. of Commerce

 

Top 10 Imports to U.S.-Basic Charts