Spring is in full bloom, baseball is underway and we are passed the first 100 days of a new presidency that is supposedly aiming to change the taxation landscape to one that would impact fiscal policy. This could change our 401k portfolios:
Summary, Last Quarter: As the new presidency gets underway, the potential of a tax code overhaul and deregulation has created an inflated equity market, i.e., the “Trump Bump”. The Federal Reserve has stayed the course by gradually increasing interest rates with concern of inflation. France did not exit the EU (“Frexit”), however this marks an uneasy period in the EU as more countries contemplate leaving the EU. Emerging markets have performed nicely as those countries evolve away from government run states to free market style economies.
Our Commentary: In the U.S., the repealing of the healthcare law failed, which was the first step in the plan to overhaul the tax code. The law is under review again and plays a role in the tax code changes, if there are to be any. If the tax changes occur, it would mean lower corporate tax rates, which in turn would mean high earnings for corporations, which would create more demand for U.S. stocks. In addition to lower corporate tax rates, the government would stand to gain by the repatriation of taxable assets of American companies that are held offshore. This is significant because this shifts the economy away from the limits of a Monetary Policy recovery and moves it towards a Fiscal Policy-driven economy. Fiscal policy has more impact on the economy as it sets taxation and spending; Monetary Policy, managed by the Federal Reserve, reacts and directs the economy according the current Fiscal Policy.
Internationally, France had a major election and decide to stay in the EU. England left the EU at the end of last year and France was the next big test of the unity or lack the of in the EU. It is widely speculated that Italy will leave the EU in the next two years and some border countries are contemplating doing the same. If this happens, the EU may end up being a smaller version of itself at best, or dissolve altogether at worst. The dissolving of the EU is highly unlikely given that France stayed and Germany will likely stay, the major economies of the EU. Meanwhile, Emerging Markets have added growth the global economy as South American and Far Eastern countries move more towards fee market economies.
We favor U.S. equities as there is less risk coupled with good potential of a tax repeal, however the international markets are offering good valuation albeit with higher risk in some areas. Thus, we are adding international back into our recommended allocations after a long hiatus.
Our Investment Committee periodically monitors the markets and will continue to provide comments at the beginning of each quarter. Each portfolio is different and we recommend getting individual help, which we are happy to provide.
Fixed income securities carry interest rate risk. Fixed income securities also carry inflation risk and credit and default risks. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss.
Certain statements contained within are forward-looking statements including, but not limited to, statements that are predictions of or indicate future events, trends, plans or objectives. Undue reliance should not be placed on such statements because, by their nature, they are subject to known and unknown risks and uncertainties.
Opinions voiced are not intended to provide specific advice and should not be construed as recommendations for any individual. To determine which investments may be appropriate for you, consult with your financial professional.
Indices are unmanaged measures of market conditions. It is not possible to invest directly into an index. Past performance is not a guarantee of future results.
International investing entails special risk considerations, including currency fluctuations, lower liquidity, economic and political risks, and differences in accounting methods.
Past performance cannot guarantee future results.