January 2017
Market Update
(all values as of 10.30.2020)

Stock Indices:

Dow Jones 26,501
S&P 500 3,269
Nasdaq 10,911

Bond Sector Yields:

2 Yr Treasury 0.14%
10 Yr Treasury 0.88%
10 Yr Municipal 0.94%
High Yield 5.72%

YTD Market Returns:

Dow Jones -7.14%
S&P 500 1.21%
Nasdaq 21.61%
MSCI-EAFE -12.61%
MSCI-Europe -15.66%
MSCI-Pacific -7.42%
MSCI-Emg Mkt -1.00%
 
US Agg Bond 6.32%
US Corp Bond 6.45%
US Gov’t Bond 7.40%

Commodity Prices:

Gold 1,878
Silver 23.72
Oil (WTI) 35.71

Currencies:

Dollar / Euro 1.17
Dollar / Pound 1.29
Yen / Dollar 104.44
Dollar / Canadian 0.75
 

Macro Overview / Year In Review

A year-end equity rally induced by a Trump victory lost momentum towards the end of December as doubts surfaced regarding Trump’s success in garnering support for his proposals from both Republicans and Democrats in the House and Senate.

Two thousand sixteen was laden with uncertainty surrounding rates, growth, oil, the election, and Brexit. The S&P 500’s 15% drop in February proved to be temporary, as did the 10-Year Treasury Bond yield drop to 1.36% in July following Britain’s vote to leave the EU. As many times before, the market’s resilience carried it out of negative territory and onward to positive gains.

Oil also made a powerful comeback in 2016, rising from $26 a barrel in February to $53 a barrel at year-end. The rise in oil prices was a result of OPEC production cuts and an abundance of production coming from U.S. producers, helping lead the U.S. towards energy independence.

Equity markets pulled back at year-end as a gradual shift from equities to bonds took place, encouraged by the recent increase in bond yields, making fixed income attractive relative to a couple of months ago. A traditional rebalancing occurs at the end of each year, either shifting assets away from stocks to bonds or from bonds to stocks. This occurs as multi-billion dollar pension funds reallocate asset classes as expectations adjust.

The U.S. dollar had strong gains against various major currencies in 2016. Clarity surrounding the Fed’s decision to start raising rates along with anticipated growth expectations from Trump’s policies have catapulted the dollar. Both the anticipation of higher rates and a growing economy can help send currencies higher.

A number of banking and financial industry regulations are in question as Trump is expected to repeal various rules and provisions that many believe have hindered lending and consumer credit expansion. Trump will have the ability to repeal numerous rules and regulations almost immediately under the Congressional Review Act (CRA). The possibility of political hurdles and non-approvals for some of Trump’s appointments may cause uncertainty leading to volatility in the markets.

Two well regarded barometers of consumer confidence rose in December to higher levels. The University of Michigan’s preliminary consumer confidence index rose to 98 and the Conference Board’s Consumer Confidence Index rose to 113.7. Sentiment among U.S. consumers is critical to the health of economic growth as greater spending evolves from growing confidence. (Sources: Univ. of Michigan, Conference Board, S&P)

 
Trump Proposes Fewer Tax Brackets

Trump Tax Proposals – Fiscal Policy

Trump’s proposals aim to simplify taxes by reducing the number of brackets from the current seven to three. Some argue that this simplification may actually raise taxes for single filers, rather than lower them. The current brackets, which have been in place for sometime, scale up from 10% to 40% over seven brackets, while Trump’s brackets scale up from 12% to 33% over three brackets.

Affecting almost all taxpayers is the standard deduction, which Trump proposes to raise from $12,600 currently for married couples to $30,000. For wage earners that are employees and not self-employed, the standard deduction can be the sole and largest deduction on tax returns.

The tax exemption on municipal bond interest has been broached as a possible elimination and is a fairly contested subject. The loss of the municipal interest exemption could make municipal bonds less desirable, making it more difficult for local counties and state governments to raise capital. Hence, this has become a highly politically charged decision.

In addition to Trump’s tax proposals, the Republicans under the House plan, have proposals of their own. The question is, on which proposals will the Trump and the House plan overlap and disagree.

Both plans propose doing away with AMT and the 3.8% Medicare surcharge on high income earners. The Medicare surcharge was essentially put in place to help subsidize the Affordable Care Act (ACA).

The elimination of itemized deductions are a mutual goal for both the House and Trump tax plans. The House plan would only retain two critical deductions: mortgage interest and charitable contributions. All other deductions would be eliminated, including the deduction for state and local income taxes, property tax, and sales tax. The Trump proposals would retain most of these deductions, but cap them at the $200,000 level.

Small business owners would benefit immensely from proposals presented by the House and Trump. The House plan would limit the tax rate for pass through entities, such as S-Corps to 25%, while the Trump plan proposes a rate of just 15%. The Tax Foundation estimates that about 95% of U.S. businesses in the United States are considered pass throughs such as S-Corps. A Trump proposal for a cut in the corporate tax rate would reduce the rate from 35% to 15%.

(Sources: donaldtrump.com, taxpolicycenter.org)

 
Job Creation & Average Annual Change In GDP By President

 

 

 
Major Holders Of U.S. Government Debt

As Trade Confrontation Looms With China….Japan Passes China As Largest Owner Of U.S. Treasuries – International Trade

U.S. Treasury Department data released in December revealed that Japan has surpassed China as the largest foreign holder of U.S. Treasuries. For years, China has held more U.S. Treasury debt than any other country, making it the single largest foreign creditor. As pressure has mounted for China to allow its currency to float freely, it has gradually been selling Treasuries in order to raise liquidity and help elevate its currency.

China has been careful not to create any perceived issues with its currency since the yuan became part of the International Monetary Fund’s (IMF) special drawing rights in October 2016. This will allow the yuan to become a legitimate reserve currency along with the euro, pound, and dollar. China’s position in U.S. debt is at its lowest levels since 2010.

Sources: U.S. Treasury, IMF,Bloomberg

 

 

Rates Commence Their Rise – Fixed Income Update

The Fed raised short-term rates in December as expected by a quarter point to between 0.5% and 0.75%, the first increase since December 2015. The Fed also announced that it expects to raise rates three times in 2017 contingent on economic growth and inflationary pressures.

Higher oil prices have actually helped the high-yield bond market, since roughly 20% of high-yield bonds are in the oil sensitive energy sector. Rising oil prices have helped stem the risk of default among the sector.

Overall bond prices fell in the last two months of the year, meaning that yields rose. Of the various bond sectors, U.S. Treasury bonds experienced the most significant jump in rates. Rates rose following the election on the premise that growth policies set in motion by the new Trump administration would generate inflationary pressures and economic expansion.

With European and Japanese bond yields still at near zero levels, the heightened yields on U.S. Treasuries has made them that much more alluring for foreign buyers worldwide. As U.S. debt lures in buyers, the yields on U.S. Treasuries is expected to level off as demand and prices return to normalized levels.

The challenge for the Fed going into 2017 is the prospect of increasing economic activity, where higher inflation may need to be harnessed by additional rate hikes. Many believe that it will be more difficult for the Fed to maintain a careful balance.

Sources: Federal Reserve, U.S. Treasury, Bloomberg, Reuters