Macro Overview Pre-election jitters led to market stagnation as equities struggled through October. With this extraordinary political year coming to a close, the results of the election will carry over to 2017 as markets digest new policies and legislative changes.

U.S. equity markets have not been enthused by the Fed’s hesitation to prolong a rise in rates. Concurrently, revised economic data projects slowing economic growth on the horizon. The perceived era of excess liquidity by central banks around the world might be concluding as consistent policy shifts with the ECB, Bank of Japan, and the Federal Reserve prepare for an end to stimulus along with a higher rate environment. In addition, a strengthened dollar has made it more difficult for U.S. companies to profit from overseas sales. The Fed’s Beige Book Report released on October 19th showed that manufacturing activity was mixed as the stronger dollar continued to dampen exports of manufactured goods.

It has been eight years since the financial crisis climaxed in the fall of 2008 when tremendous uncertainty and pessimism lurked throughout the markets. Today, the stimulus efforts that were set into motion by the Fed are for the most part still in effect. Many agree that the markets today are far less precarious than they were in 2008, yet the Fed’s stimulus efforts have yielded minimal, if any, sustainable economic growth.

A topic of contention during the election was how to tax profits of large U.S. companies with overseas operations. About 50 U.S. companies account for $1.7 trillion of the $2.9 trillion of profits held overseas. So for every product a U.S. multi-national such as Apple, GE, or Microsoft sells in another country, any profits made are taxed when the money is brought back to into the U.S.

Currently, the Federal Reserve only purchases government securities in the open market as a form of stimulus and influence over the markets. Former Treasury Secretary Lawrence Summers recently endorsed the idea of having the Fed not only buy government securities, but corporate bonds and equities as well. Such a move might continue to support the bond and equity markets even if a rate rise were to take affect.

Fed Chair Janet Yellen coined a new phrase in October “high pressure economy” as she suggested that a tight labor market might draw in potential workers who would otherwise sit on the sidelines. The challenge has been that as the unemployment rate has gone down, so has the pool of qualified workers, leaving certain positions unfilled.

A research report released by the National Institute on Retirement Savings identified that working individuals are actually trying to save more as they approach retirement, while spending less at the same time. This is counterintuitive to what the Fed was hoping for as part of its stimulus efforts. Sources: Federal National Institute on Retirement Savings

(all values as of 10.31.2016) Stock Indices: Dow Jones 18,142 S&P 500 2,126 Nasdaq 5,189 Bond Sector Yields: 2 Yr Treasury 0.86% 10 Yr Treasury 1.84% 10 Yr Municipal 1.75% High Yield 6.19% YTD Market Returns: Dow Jones 4.12% S&P 500 4.02% Nasdaq 3.63% MSCI-EAFE -2.95% MSCI-Europe -5.94% MSCI-Pacific 3.03% MSCI-Emg Mkt 13.97% US Agg Bond 4.90% US Corp Bond 8.23% US Gov�t Bond 5.52% Commodity Prices: Gold 1,278 Silver 17.90 Oil (WTI) 46.71 Currencies: Dollar / Euro 1.09 Dollar / Pound 1.33 Yen / Dollar 104.69 Dollar / Canadian 0.74

In this quarter’s investment commentary, we briefly review and recap our current asset class views, before discussing …

In ourview…



Equity Update – Domestic Equities Update A strong dollar eroded some corporate earnings as U.S. companies with offshore revenue found it tougher to generate profitable sales. The U.S. dollar has been moving higher against most developed and emerging currencies in anticipation of a rate rise before year-end.

The energy sector, which currently represents 7.3% of the S&P 500 Index, has been a significant distracter of earnings for equities. With continued low oil prices, earnings for energy companies have also fallen, making earnings for the S&P 500 look dismal. Optimistically, when stripping out energy sector earnings, the rest of the S&P 500 sectors are roughly unchanged.

U.S. banks reported stronger than anticipated quarterly earnings as trading helped banks keep profitable. Recent contentions surrounding banking practices might lead to reformed legislation for banks, disallowing them of some activities that have added to their profitability.

More equity analysts are not just looking at company earnings to determine stock valuations, but are also eyeing interest rate levels and how much cash is being returned to shareholders.

Recent divergent stock sector performance is being caused by the anticipation of rising rates, earnings, and mergers. Assets moving from one sector to another (known as sector rotation) is also being induced by the coming rate rise and earnings expectations. Sources: S&P, Bloomberg

International Update


British Pound At Lowest Levels Since 1985 – Currency Overview The pound traded at its lowest levels versus the dollar since 1985, off 22% from its June high before the Brexit vote. The pound’s strength has become incredibly contingent on the outcome of Brexit, placing tremendous pressure on the currency at a critical time.

There has been a steady descent in the pound since the vote. Markets are concerned that as Britain plans its exit, which is expected to happen in the next two years, it will dramatically hinder the financial and banking sectors. The reason is that exports of British products to the EU might be severely limited once the exit has taken effect. Britain’s current prime minister has expressed priority in limiting the influx of immigrants into England from the EU. This stance could very well become a significant issue with the EU, since not allowing immigrants from the EU the rights out to access Britain would surely threaten Britain’s ability to trade and travel freely throughout the EU. The most vulnerable sector to such retaliations are the financial and banking sector, which heavily rely on free movement of employees throughout the various country’s in the EU. The financial and banking sector accounts for 12% of Britain’s GDP, a considerable portion of the economy.

Since Britain’s economic future has become contingent on the outcome of Brexit, the IMF downgraded its growth forecast for the country, predicting that the British economy will only grow a paltry 1.1% in 2017. Source: IMF, Bloomberg, Reuters

Currency (comparative)


Fixed Income Update – Global Bond Markets
Money market fund reforms took effect on October 14th, which indirectly led to an increase in short term rates. A key lending rate known as the Libor (London Interbank Offered Rate) rose to 0.87%, a rise from 0.32% a year ago. It is expected that some variable mortgages indexed to the Libor might start to see increases.

Brazil’s central bank cut its key lending rate in October for the first time in 4 years. The monetary policy committee cut its benchmark rate by 25 bps to 14% from 14.25%.

Yields on U.S. corporate and government bonds rose in October, as a rate rise sentiment impeded any rise in bond prices. The 10-year U.S. Treasury yield rose from 1.60% at the end of September to 1.84% on October 31st. Short term government rates have also risen recently, with the 2-year Treasury note edging up to 0.86% as of October 31st. The slight upward shift in both short-term and long-term rates is indicative of a shift up in the yield curve, meaning that an overall change in rates is occurring.
Sources: U.S. Treasury, Fed, Bloomberg

Interest Rates


2016 Election Results The financial markets embraced a Trump victory, sending stock prices to higher levels following a nine day consecutive decline in anticipation of uncertain election results.
U.S. Treasury yields rose dramatically with the expectation that a Trump presidency along with a Republican controlled Congress will inevitably ramp up government spending in order to boost economic growth. During the campaign, Trump was very critical of the Federal Reserve not acting to raise rates soon enough, insinuating political influence.
The Republican win in the Senate and House along with a Republican president means that legislation and laws will flow much more quickly through Congress, rather than running into stalemates as with a divided Congress.
Trump and many republicans have been calling for a rollback of various laws and regulations put in place during the Obama administration. A focal regulatory act is the Dodd-Frank Act, put in place following the financial crisis of 2008/2009, creating immense regulatory costs for the banking sector.
Ratings agency Standard & Poor’s affirmed the investment-grade ‘AA+/A-1+’ rating of U.S. government debt, a day after the presidential election, while maintaining its stable outlook. The agency stated that it will “assume the longstanding institutional strengths and robust checks and balances of the U.S. that will support policy execution in a Trump administration, despite the president-elect’s lack of experience in public office, which raises uncertainty on policy proposals.”

The following are expected to be affected by policies and regulations set into place by a Trump presidency and the Republican controlled House & Senate:

Fiduciary Rule During the election Trump did present the idea of perhaps reversing the fiduciary standard that has just recently been implemented by the department of labor.
Tax cuts for individuals and corporations  Both Trump and the house Republicans have been pushing for tax reform plans that would lower individual and corporate tax rates. Trump has proposed reducing the corporate tax rate to 15% from the current 35%.
Health care reform including the possible dismantling of Obamacare The modification if not dismantling of Obamacare was a key theme with Trump’s campaign.
Trade and exports Foreign countries with trade agreements in place with the United States are concerned that Trump’s presidential victory might lead to an upheaval of existing trade and economic arrangements. The North American Free Trade Agreement (NAFTA) has been a primary target of Trump.
Infrastructure A Trump presidency, as well as a Republican controlled Congress, has set the stage for increased government spending as well as increased spending on infrastructure starting in 2017.
Defense contractors Historically, Republican leadership has usually been supportive of defense spending.
Coal industry During his campaign, Trump voiced his support for the U.S. coal industry and China’s pursuit of the industry.
Oil and natural gas drillers During the campaign, Trump reiterated his support for the oil and natural gas industry, perhaps curtailing various regulations inhibiting further growth and industry profitably.
Pharmaceuticals & Biotech Hindered by Obamacare and recent regulations, Trump has proposed scaling back pricing regulations.
Banking Industry Should Trump and the Republican controlled Congress decide to alleviate current regulations such as Dodd-Frank, the regulatory environment would become less inhibited for U.S. Banks to generate profits and loan money to consumers. A rising interest rate environment is always beneficial for banks.
Market performance following presidential elections have varied over the decades, however, Trump’s affect on the S&P 500 Index of 1.11% was one of the best for both Democratic and Republican presidential victories ever. Obama’s win in 2008 saw the largest drop of -5.27%, while Reagan’s victory in 1980 saw the largest gain of 1.77%. Sources: S&P, Moody’s, Reuters. Bloomberg