Once again, the
stock market was kind to us, in the quarter just finished, giving us two back
to back solid quarters in the equity markets.
The bond or fixed income market also had a good first quarter of 2017,
unlike its experience during the fourth quarter of 2016.
The question on
many minds is how much longer the bull market can continue, given that we are
now eight plus years into this run. I
don’t know. Therefore, we have chosen,
both personally and professionally, to take a long term view, to embrace
uncertainty, and to have a deep understanding of what money can and cannot do.
Looking at
specific investment sectors for the first quarter, the Dow Jones Industrial
Average was up 4.56%, the S&P 500 was up 5.53%, and the NASDAQ Composite
was up 9.82%. Turning to international
markets, the MSCI Emerging Markets Index moved from 380 to 423 during the first
quarter, an increase of 43 points, or 11.3%.
The MSCI Europe and Middle East Index moved from 89 to 95 during the
first quarter, an increase of 6 points, or 6.7%.
Yield on ten
year Treasuries stand at 2.4%, about where they started the year, in spite of
the Fed’s interest rate increase. The
Fed is suggesting another two or three interest rate increases this year. It is very likely that bond prices already
reflect these anticipated changes. BLV,
the Vanguard long bond ETF, started the year at $89.13, bottomed in mid-March
at $87.41, and finished March at $90.04.
As noted in past
commentaries, the market’s outperformance appears to be driven by the expectation
of tax reform and eased government regulation.
To date, Congress and the White House are still working toward achieving
these goals.
Turning our
attention to the economy, GDP during Q4 2016 was just over 2% on an annualized
basis, roughly in line with performance among heavily regulated, mature
economies. It is possible to increase
this growth, though such growth would require significant intent and follow
through on the part of Congress, the White House, and regulators.
The referenced
tax reform and regulatory easing would be good steps in the right direction. By way of information, an increase to a 3%
annual growth rate from a 2% growth rate would add more than $180 billion in
economic activity, based on 2016 GDP of $18.55 trillion. Project this difference over ten years, and
it’s not hard to imagine hundreds of thousands of new jobs, increasing wages,
billions in capital formation, thousands of new business start-ups, significant
increases in tax revenue to balance strained budgets, and a variety of other
positive outcomes.
Consumer
spending was up 2.4% during Q4 2016.
Household finances are fairly sound, according to Moody’s, with
household debt service near a 35 year low, and household savings holding steady
at close to 5%. My guess is that the
trauma of 2008-09, and the financial habits developed by many during that time,
won’t be soon forgotten.
Kate Taylor
wrote an interesting article for Business Insider on hometown food retailer
Chick-fil-A. According to the article,
which you can find at http://www.businessinsider.com/chick-fil-a-is-the-most-polite-chain-2016-10,
the key to the chain’s success is politeness.
Based on just my experience, it seems that the words “please”, “thank
you”, and “my pleasure” are imbedded in the DNA of all Chick-fil-A
employees. The time, energy, and money
that the company invests in training apparently pays off, as the stores average
$4 million in annual sales, compared to the KFC average of $1 million per
store.
Quote of the
week:
“Politeness
is the flower of humanity.”
Joseph
Joubert
“Be polite;
write diplomatically; even in a declaration of war one observes the rules of
politeness.”
Otto von Bismarck
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