Q3 2016 Newsletter

As monetary stimulus has “run its course” in assisting the economy, increasingly there is an eye towards fiscal stimulus.  According to the Committee for a Responsible Federal Budget, over the next 10 years, Clinton’s fiscal plan would increase government spending by almost $2 trillion while balancing this spending with tax increases.  Trump’s plan, on the other hand, focuses on reducing taxes by over $4 trillion.  One thing is sure, both candidates have drastically different approaches for growing the economy.

It’s an understatement to say that monetary stimulus has not provided the impact central bankers hoped it would.  As the Federal Reserve has increased the money supply, there has been an offsetting move in the velocity of money.  One expectation is that stronger fiscal stimulus will positively impact the economy by increasing the speed at which money changes hands.

While we have seen a slight uptick in market levels over the past quarter, the question is, is it sustainable?  Our view of the domestic economy is that there will be modest GDP and corporate earnings growth.  For 2017, macroeconomic signals look stronger currently.  Signs indicate potential for higher growth in total industrial production, retail sales, durable and nondurable goods orders, and continued private sector employment, to name just a few.

Internationally, there are also signs of growth as we head into the end of the year.  Namely, positive momentum in China’s leading indicator, among other factors, shows an economy stabilizing.  Similar patterns exist in Canada, Mexico, Europe and some emerging markets.

On another note, we have not experienced broad-based inflation in over twenty-five years.  Deflationary trends are dissipating and inflation could start to build momentum.  Wage inflation has begun but has not resulted in a corresponding pass through of higher costs to consumers yet.  This could change next year, leading to inflation and subsequent interest rate hikes.

Earlier this year we made adjustments to our equity model.  This summer we made further changes to the international positions and continue to look for new names to add at reasonable valuations.  Additionally, in this low-interest rate environment, we have obtained very attractive returns on the fixed-income portion of our portfolios.  We will continue to fine-tune the portfolios as we move through this election cycle and into the end of the year.

Best Regards,
Marc Henn CFP ®, President

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