2017-Q2 Quarterly Update
July 18, 2017
Dear Mr and Mrs Smith
2017 is half over. At the end of the second quarter the S&P 500 Index stood at 2423.41 already surpassing our estimate for the entire year. I guess that means it’s time to pack the family in the vehicle and take our summer trip. We will program our destination in the GPS (nobody has a road map anymore), and journey down the road until we hear the inevitable… recalculating, telling us we’ve taken a turn not expected by our mechanized route guide. The Stock Market had a journey of its own in the second quarter and the route it chose was not the expected one.
We began the quarter with an active legislative agenda. Congress would quickly reform healthcare and then turn its attention to tax reform…recalculating. By quarter’s end no major legislation has passed Congress. While a distracted Congress has not hurt the stock market performance so far, some of the gains we have seen and most of the projected future gains are based on corporate tax reform.
Great Britain’s new Prime Minister called a “snap election” confident her party would win a larger majority in Parliament and France’s election saw the emergence of an extreme socialist as a leading candidate, calling for withdrawal from the European Union…recalculating. The British election resulted in a coalition government, weakening the Prime Minister’s ability to govern. The French elected a political centrist in favor of market reform. The Euro strengthened, the Dollar weakened.
We began the second quarter with an OPEC production cap designed to eliminate the oil glut in the world and drive up oil prices by the start of driving season…recalculating. American shale oil companies have driven down their production costs allowing them to produce more and profit from lower priced oil. Oil will remain range bound between $40 and $60.
The Federal Reserve Board raised their key interest rates by 25 basis points in June setting the stage for higher interest rates generally, and battling inflation which had risen to over 2% in the first quarter…recalculating. Interest rates fell after the Fed meeting with the 10 year treasury yield starting the second quarter at 2.39% and falling to 2.17% by June 15, and ending the quarter at 2.31% while inflation fell back towards 1%.
The S&P 500 Index closed the 2nd quarter near all-time highs so everything must be high...recalculating. During the quarter the market diverged with the largest 50 firms outperforming the rest of the index substantially. This distorts the Index value upward.
It’s time to shut off the GPS. TIA has a road map. It says stocks stay higher and interest rates stay lower than in previous credit cycles. We believe this remains an earnings driven market not a news driven market. Our stock portfolios are based on fundamental research, not the latest news. The Preferred Income Portfolio (PIP) eliminates the anxiety of investing in stocks while providing a 6% to 7% annual income. We believe our portfolios are well positioned going into the second half of 2017 as the stock market refocuses on fundamentals. Our goal is to get you safely to where you want to be.