The Intelligent Investor
A bi-weekly publication from Consultiva Internacional, Inc. (Registered Investment Adviser) November 15, 2016
From the Executive Desk
Now that we know the election results, what economic policies can we expect from the incoming administration? President-elect Donald Trump was quite clear during the campaign about the economic issues he wants to address during his administration, but he seemed, as a colleague put it, deliberately “opaque” about how he would go about doing things. Most likely we will have to wait for his cabinet and economic counsel to give us the specifics, but here’s what we know: Trump wants to put forward a “pro-growth” tax cut, which his supporters say will be as big as Ronald Reagan’s 1981 reform. Trump wants to simplify the tax code and reduce marginal rates that would encourage investment and economic expansion. His proposed corporate tax rate of 15 percent seeks to make it easier for domestic firms to repatriate earnings, and also make the U.S. more attractive to foreign investors. Small business would also pay 15 percent tax on income.
Another “pro-growth” measure is the adoption of an energy policy that furthers the exploitation of fossil fuel resources in the U.S. to build additional reserves that would presumably give the country greater leverage in energy markets. This would be accompanied by reversing executive action that seeks to promote clean energy production, such as the Clean Power Plan adopted in 2015 by the Environmental Protection Agency.
Finally, it will be very interesting to see just how Trump’s economic team deals with trade. During the campaign the President-elect said China is stealing and cheating the U.S. in its trade agreements and that jobs needed to be recovered from Mexico and other jurisdictions. However, in many instances it has been the U.S. based multinational themselves who have sourced from China to assemble or distribute finished products at home, and they have also moved part of their production process to countries that are less regulated and offer cheaper labor, in pursuit of increased profits along the value chain. Negotiating better trade deals could help the U.S. economy, but taking a “tougher” stance might not necessarily increase support for the Republican Party’s historic open markets discourse.
Myrna Rivera, CIMA®
Founder & Chief Executive Officer
As October progressed, futures markets suggested a growing likelihood that the U.S. Federal Reserve would increase interest rates before the end of the year. Entering the month, the probability of a December rate increase from the Fed was at 59%, according to Bloomberg data. The central bank’s September Federal Open Market Committee (FOMC) meeting minutes showed that the decision to leave rates unchanged was a “close call.” In fact, three policy-makers dissented, the most since 2014. Fed Vice-Chair Stanley Fischer warned of the dangers of low interest rates, suggesting they could lead to longer recessions, making the economy more vulnerable. Additionally, several regional Fed presidents suggested the improving trend of economic data could warrant a possible rate hike. Early-month releases did, in fact show signs of improving economic growth. Research firm Markit’s survey of U.S. services sector activity expanded at the fastest pace in more than a year. Consumer prices ticked up 0.3% in September, the highest level in two years as U.S. inflation inched closer to the Fed’s 2% target rate. The positive momentum continued at month’s end, when the Bureau of Economic Analysis reported U.S. GDP rose at a 2.9% annualized rate in the third quarter (see graph I below). That was above consensus expectations of a 2.6% climb and represents the fastest rate of growth in two years. Amid these conditions, Fed futures spiked by month’s end, with the prospect of an interest rate increase in December climbing to 71%. In the wake of the Fed commentary and optimistic data, U.S. Treasuries declined in October for the biggest monthly loss since February 2015.
(As of November 14, 2016)
CPI: +1.5% Chg. from yr. ago
Unemployment Rate: 4.9%
GDP: 2.9% Comp. Annual rate of Chg. on 2016:Q3
Ind.Prod.Index: +0.1% change from previous month
Source: St. Louis Fed. Res.
CPI: 0.4% Chg. from yr. ago
Unemployment Rate: 10.0%
GDP: 0.3%, Comp. Annual rate of Chg. on 2016:Q2
Ind.Prod.Index: -0.8% change from previous month
Source: Moody’s Analytics
CPI: -0.5% Chg. from yr. ago
Unemployment Rate: 3%
GDP: 0.5%, Comp. Annual rate of Chg. on 2016:Q3
Ind.Prod.Index: 0.0% change from previous month
Source: Moody’s Analytics
CPI: 0.1% Chg. from yr. ago
Unemployment Rate: 11.9%
Payroll Employment: -0.4 Chg. from yr. ago
GDB Econ. Act. Index: -1.3% Chg. from yr. ago
Source: P.R. GDB
Stocks: In October the benchmark S&P 500 lost 1.9% for a third consecutive monthly decline. Telecom stocks led the losses, while Energy shares also underperformed in sympathy with a drop in crude prices. Financials were the best performing sector, leading the S&P 500 amid a positive start to third-quarter earnings season. Citigroup, Goldman Sachs and Morgan Stanley each advanced, buoyed by a surprise uptick in fixed income trading revenue. Table I below presents a summary of all market indices.
Bonds: In the wake of the Fed commentary and optimistic data, U.S. Treasuries declined in October for the biggest monthly loss since February 2015. The 10-year note yields touched the highest since May amid increasing speculation the Federal Reserve will raise interest rates in December.
Alternatives: According to the World Bank’s October report, most commodity prices continued to rise in the 3rd quarter from their lows in early 2016. Energy prices rose more than 3% in the 3rd quarter of 2016 from the 2nd quarter. Coal prices surged 30%, U.S. natural gas prices were up 33%, and crude oil prices were slightly lower, averaging $44.7/bbl, as greater supply returned to the market.
Evangeline Dávila, CIMA®
Chief Research & Investment Officer
Source: Callan Associates, Inc.
U.S. equities declined in October amid a confluence of corporate, central bank, and geo-political forces. U.S. Treasuries experienced their worst month so far in 2016 as improving economic data increased concerns over a rise in the federal funds rate. Amid an uncertain scenario, were downside risks are combined with expectations of muted returns, we continue to recommend prudent asset allocation and risk assessment, based on future capital needs, for plan sponsors, institutions and individual investors. Due diligence reviews and an adherence to a well-developed investment policy remain the most prudent course for long-term investors. Continued fiduciary education is paramount.
Consultiva Internacional Inc. (“Consultiva”) has compiled the information for this report from sources Consultiva believes to be reliable. Sources include: investment manager(s); mutual fund(s); exchange traded fund(s); third party data vendors and other outside sources. Consultiva assumes no responsibility for the accuracy, reliability, completeness or timeliness of the information provided, or methodologies employed, by any information providers external to Consultiva. Conclusions reflect the judgement of Consultiva Investment Strategy Committee at this time and is subject to change without prior notice. There also can be no guarantee that using this information will lead to any particular result. Past performance results are not necessarily indicative of future performance. Diversification does not guarantee a profit or protection against loss. This document is for informational purposes only and is not intended to be an offer, solicitation, recommendation with respect to the purchase or sale of any financial investment/ security or a recommendation of the services supplied by any money management organization neither an investment advice or legal opinion. Investment advice can be provided only after the delivery of Consultiva’s Brochure and Brochure Supplement (ADV Part 2A and 2B) once a properly executed investment advisory agreement has been entered into by a client and Consultiva. This is not a solicitation to become a client of Consultiva. There are risks involved with investing including the possible loss of principal. All investments are subject to risk. Investors should make investment decisions based on their specific investment objectives, risk tolerance and financial circumstances. The registration with the Securities and Exchange Commission does not imply a certain level of skill or training.