The steady diet of headlines pouring out of the Trump administration has been unsettling for most Americans, regardless of where they sit on the political spectrum.
We know equity markets loathe heightened uncertainty — and what is happening in Washington is generating an enormous amount of political uncertainty. The word “impeachment” has even been bandied about in conventional circles. It was responsible for a one-day selloff last month that cost the Dow 373 points.
Blame the knee-jerk reaction on allegations President Trump asked then-FBI Director James Comey to end an investigation of former National Security Advisor Michael Flynn. There hadn’t been much downside action in the major indexes recently, so talk of impeachment jarred the short-term crowd.
But, political as well as international uncertainty has yet to generate economic uncertainty. Hence, and this is important, we have seen little downside in stocks. It really is about the economy.
Given the comparisons to Watergate, let’s take a high-level look at what was happening economically in the early 1970s and compare it to today.
Table 1: Then vs. Now
Source: St. Louis Federal Reserve, U.S. State Dept.
As Table 1 illustrates, the fundamentals are radically different today.
Beyond this brief synopsis, we’ll stay out of the political weeds and let you form your own opinions. But we feel it is important to provide some context in relation to the markets — sticking to your financial roadmap.
Table 2: Key Index Returns
Source: Wall Street Journal, MSCI.com, CNBC, Morningstar
MTD returns: April 28, 2017 – May 31, 2017
YTD returns: December 30, 2016 – May 31, 2017
**in U.S. dollars
A couple months ago, we touched on the failure by the House to pass a so-called “repeal and replace” for Obamacare. It had little impact on shares. Like it or not, the House finally passed a healthcare bill last month, and it did little to boost shares.
The crown jewel for investors, however, has always been a cut in the corporate tax rate. Well, what seemed like a certainty immediately following the election has become murky. In fact, a late May article in the Wall Street Journal entitled “GOP’s Proposed Tax Changes Are No Match for Status Quo — Republican lawmakers’ boldest ideas for changes are on political life support…,” summed up the dilemma the party is facing.
We were told by the pundits that political gridlock and any unraveling of Trump’s tax cut and infrastructure agenda would pound stocks. It’s not yet unraveled, but bold economic changes from Washington are at risk.
Yet, stocks are near all-time highs.
Why? We think what we are beginning to see is the passing of the baton. An investor-friendly agenda in the post-election climate that fueled market gains has been replaced by stronger economic fundamentals.
S&P 500 profits in Q1 came in at the fastest pace since Q3 2011, according to Thomson Reuters. And forecasts for the year have been relatively upbeat.
Simply put, the fundamentals “trump” the negative headlines, whether those headlines originate in the U.S. or overseas.
The longer-term focus of the markets has always been the economic fundamentals. We believe that focus has not changed.
Unless the economy is significantly impacted, unexpected and alarming events may create short-term volatility, but they rarely create long-lasting impact.
Shedding light on a confusing maze of options — financial literacy
We recently came across a definition of financial literacy in Wikipedia that we believe sums up the term well. We’ll paraphrase: “It refers to the set of skills and knowledge that allows an individual to make informed and effective decisions with all their financial resources.”
How do you manage money? How do you come up with financial goals and a plan to reach them? How do you make effective decisions with your financial resources?
These are easy questions that don’t command easy answers. You see, the financial arena is much more complex than it was 50 years ago. There is a downside to the proliferation of choices we have today. It adds a layer of complexity and creates confusion. Many don’t know where to begin. Many fall into paralysis by analysis.
One of the goals of our firm is to educate the investor. We know we cover various topics in our meetings and in our monthly newsletter, but we’ve learned some folks feel uncomfortable about asking questions they perceive as too simple. Don’t we all?
There truly isn’t a bad question. We want you to be comfortable with what we recommend. We understand you reach out to us for assistance with your finances, and we take that responsibility very seriously.
While the financial plans we advocate encompass basic principles, we do not take a cookie-cutter approach. Instead, we tailor our advice to your unique situation.
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