School is back in session, football season is beginning and a new tax policy is supposed around the corner. A change to the tax policy would impact fiscal policy and could change our investment outlook, and the 401k portfolio:
Summary, Last Qtr: Equity and bond markets have been hanging around the same zone as stocks continue to strengthen and bonds stay about the same while the Federal Reserve waits for signs to raise interest rates. An interest rate hike would likely be a negative impact on bonds and possibly the same for stocks. While there was some anticipation that the Federal Reserve would be forced to raise interest rates, corporate earnings, employment and inflation numbers told a different story. Inflation was lower than the Fed would like it to be before they raises rates, but employment and corporate earnings faired better than expected. Additionally, global markets are starting to look healthy once again, thereby bringing investment inflows to those shores.
Our Commentary: Demographics are becoming increasingly important as developed countries see their populations grow older, as the baby boomers are in the United States. The first of the baby boomers turned seventy years old in 2016, signaling a significant change for the workforce and government programs, not to mention investment ramifications. While the current economy is in later growth stages, low inflation is thwarting the desire of the Federal Reserve to raise interest rates, leading to a bit of a show down between inflation and the Federal Reserve. As interest rates remain low, stocks should continue to outperform, especially if a tax policy were to materialize.
Internationally, emerging markets have done well since the beginning of the year and developed markets are doing much better than in recent years. It appears that “exits” from the EU are over at least for the time being, as there are no other countries seriously threatening to exit at this point. North Korea’s insistence on nuclear weapons advancement has created tension and market turmoil, but that seems to be contained at least at the time being. Further provocation could escalate tensions and the key this situation is China and how they view any retaliation. We continue to favor U.S. equities; however we see improvement in the international markets. Bonds continue to lag as inflation stays low, thereby earning a lower allocation.
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.
See you next quarter!
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