2017 Q1 Market Commentary

This past year has been an exhausting one for many investors: China started rebalancing, the Federal Reserve Bank (Fed) failed to raise interest rates for most of the year, Europe grappled with Brexit, political tensions rose in Ukraine and the Middle East, and the US suffered through painful elections before ultimately choosing Donald Trump. Surprisingly, while any one of these events could have caused a market setback, the markets kept plugging along valiantly – albeit with bouts of volatility – even as global growth stayed low.

US Equities led the way in the fourth quarter and for all of 2016 and ultimately turned in a very positive result. The S&P 500, a broad measure of US stock market performance, returned nearly 12% for the year, and small-cap stocks performed even better. There was a lot of drama behind the scenes of those returns. The year began with a sharp 14% market drop in mid-February, amid worries of a China crisis and US recession, then everything reversed in a great “pain-trade” whereby 2015’s losers mostly became 2016’s winners. The surprise election victories by President Trump and Congressional Republicans kicked these trends into overdrive with a year-end stock market flurry. Other markets did not fare as well, resulting in muted gains for diversified portfolios. International stocks were mostly unchanged in dollar terms. US Fixed Income, as measured by the Barclays Aggregate, managed to produce slightly positive returns despite a year-end interest rate increase.

Confidence drove much of the fourth quarter returns for US stocks. On the heels of our November elections, consumer confidence reached the highest level in over a decade as measured by the Consumer Confidence Index. Americans’ annual end-of-the-year holiday shopping spree boosted Gallup’s daily measure of consumer spending to the highest average for December since Gallup began tracking spending in 2008. The self-reported daily average spending of $105 is a $7 increase from $98 in November and a $6 hike from $99 during December 2015. The $105 average for December is also the highest for any month since May 2008 ($114), when the government issued rebate checks to boost spending.

Most analysts believe this surge in confidence is due to the election of Donald Trump. This “Trump Effect” is somewhat troubling. What exactly Trump wants to do is unknown; what exactly Trump will attempt to do is unknown; what exactly Trump can do also is unknown. Perspective is important as a political promise is not always reality. A few years ago, expectations soared on the election of Japanese Prime Minister Abe with his positive “can-do” attitude and promise of simulative “Abenomics.” Failure to implement many of the proposed policy changes has resulted in underwhelming economic performance.

Our concern is that many Americans don’t realize how difficult it will be for Mr. Trump to implement many of his economic policies. Some of his goals to reverse certain actions taken by President Obama can be enacted by Executive Orders, but most will require Congressional approval. Despite Republican majorities in the House and the Senate, Trump does not have a green light, especially on priorities such as across-the-board tax cuts for individuals and corporations, over a trillion dollars in infrastructure spending, and rolling back many government regulations. Thus, we fear disappointment in the new administration could quickly materialize. Since consumer spending accounts for approximately 70% of the economy, the impact of such disappointment could prove serious.

Notwithstanding the concerns outlined above, we feel there are ample reasons to be optimistic. Most economists believe the US is not on the verge of a recession. The Fed appears poised to take a measured approach to interest rate increases and has shown a willingness to hold off at the first sign of weakness. The US economy is operating at (or very close to) full employment. Inflation remains in check. US stock prices, while high, do not appear overvalued. With all the positives in the US, it can be tempting to doubt the value of diversification. A natural reaction to the underperformance of international stocks the past several years is to invest more in the US. We believe it is as important as ever to remain diversified and maintain exposure to asset classes outside of US stocks.

It can be hard to stick to an investment process when financial markets seem to ignore everything they are built on (as seems to be the case in Europe). However, it is precisely times like these we must remind ourselves that an investment process aims not only to identify investment opportunities but also to prevent investors from making behavioral mistakes. We believe giving up on the favorable fundamentals in the Eurozone would be such a mistake. And we continue to trust they will lift Eurozone financial markets. As always, we recommend filtering out the noise generated by a 24-hour news cycle as much as possible, staying diversified, and taking a long-term approach to investing.

The views and opinions expressed are of White Horse Advisors, LLC. This commentary is provided for educational purposes only and should not be construed as investment advice. White Horse Advisors is an investment advisor firm located in Atlanta, GA.