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Second Quarterly 2017 Letter

HG Wealth Management • 2nd Quarter 2017 Letter

Update on the Markets:

Index 3rd Quarter 2017 Year-to-Date
S & P 500 (Large US Stocks) 3.09% 9.34%
Russell 2000 (Small US Stocks) 2.46% 4.99%
FTSE All World ex-US (International Stocks) 5.78% 14.16%
Barclays US Aggregate (Bonds) 1.45% 2.27%

July 1, 2017

And the Rally Continues

Despite daily histrionics out of Washington, North Korea’s determined quest for a nuclear weapon, the Federal Reserve raising rates, etc. global stocks continue to rally. The S & P 500 stock index is up 9.34% year-to-date (including dividends). Stranger still, bonds are doing well too. These two asset classes often move in opposite directions. Calm markets have many thinking back to 2000 and 2007 when glassy waters preceded steep drops in stocks. Stock volatility is extremely low. Despite the good times, I sense anxiety levels remain high. This bull market – the second-longest bull market ever – remains feared and unloved. Much of these feelings are due to fresh memories of the severity of the last bear market in 2007 – 2009 when the S & P 500 index fell 57%. How long can this last?

Will Trump’s Missteps Derail this Bull Market?

From my conversations with many of you, I know that this is on your mind. No one can predict the markets, of course, but I think it’s still too early to give-up on the pro-growth, business-friendly policies that the Trump administration may still achieve: lower taxes, less regulation, and more infrastructure spending.

More importantly, there are other factors that are contributing (maybe more) to the stock rally.

  • A Growing US Economy. Although we can’t seem to get out of a low-growth, “new normal” economy, the US economy continues to chug forward. Predictions for GDP are 2.1% for 2017 and 2.4% for 2018 – not too hot, not too cold. The labor markets are tightening, so the consumer can keep buying. Home prices are rising. Most important: corporate earnings are very healthy. According to FactSet, 2Q2017 corporate earnings are expected to rise 6.8%. Interestingly, FactSet also reports that Trump is no longer a topic of discussion on 2Q earnings calls.
  • Strong Global Growth. In the past few years US and China accounted for most of the world’s economic output, but now other economies are growing too. In its World Economic Outlook, the IMF predicts world growth to increase from 3.1% in 2016 to 3.5% in 2017 and 3.6% in 2018. The IMF goes on to say: “global economic activity is picking up with a long-awaited cyclical recovery in investment, manufacturing, and trade and deflationary pressures are easing.”
  • Protectionism Warning. Despite Trump’s campaign promises, he has not yet embroiled the US in any trade wars. Trump has not named China a currency manipulator. He will renegotiate Nafta, instead of pulling the US out. He has not slapped aggressive tariffs on imported goods from China and Mexico.
Going Forward

Bull markets do not die of old age. Despite its long tenor, chances are good that this market will continue going up – climbing a “wall of worry” as they say – into 2018 and even 2019. I don’t recommend adding aggressively to stocks right now. Wait for corrections and add foreign stocks especially.

Please let me know if you have any questions or concerns. – Henry

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