Concord Investment Counsel

January 11, 2017

Rising Consumer Confidence Leads Equity Markets Higher!

2016 was a volatile year for the global economy and the world’s financial markets. The year began with the markets and the economy drowning in pessimism, but ended with consumer confidence at a 15 year high and the DJIA knocking on the door of 20,000. One might say that investors have blind optimism in pushing the DJIA to all-time highs given the fact that significant obstacles remain in the path of our economy. Mr. Trump is likely a big part of the reason for this optimism. His campaign identified and shouted from the mountaintop the problems that have handcuffed the globe’s economic superpower for the last decade.

Whether Mr. Trump can seek and destroy these obstacles and clear the path for America’s economy remains to be seen. Nonetheless, investors seem excited about his plans despite no improvement in the earnings recession that has gripped America for the last two years.

Domestic US stocks moved higher in 2016 with the S&P 500 gaining over 11% for the year and close to 4% in the last quarter. Leadership in the equity market changed after the election. Growth stocks carried the baton during the first through third quarters of 2016 and then handed the baton to value stocks after the election. Defense, aerospace, industrial giants, energy, and bank stocks, that had performed poorly for the last few years quickly came to the top in the last few months of 2016 as leadership in growth stocks paused as investors weighed Mr. Trump’s plans to renegotiate trade deals with Asia and end the theft of US technologies in China. Foreign markets sold off as a result of these statements and emerging markets fell 5% or more in the fourth quarter (EEM -5.4%).

Mr. Trump’s plans for cutting corporate taxes caused a significant selloff in the bond market. Treasuries and investment-grade corporate bonds performed poorly in the fourth quarter. Long treasuries dropped over 12% in the fourth quarter (TLT -12.6%). Gold likewise plunged 13% in Q4 along with other commodities. The rise in interest rates was not greeted well by real estate investors and REITs fell 3% to 10% in the fourth quarter. US Stocks were the sole asset class that performed well in 2016 and as a result diversified portfolios had only modest gains for the quarter and the year. Volatility also chipped away at performance as nervous investors braced the storms that occurred in February as the economy threatened to fall back into recession.

2016 was marked by modest but steady growth in consumption. Retail sales rose over 3% led by strong demand for consumer durable products. Demand for financial services continued to improve and the banking sector is finally showing modest growth. Demand for healthcare remains at all-time highs with strong growth in pricing. Consumer confidence as measured by the conference Board rose to 113.7, a level not seen since 2002. Most of this rise came after the election. Corporate investment remained flat to lower as corporate America seemed content with its capacity given only modest growth in trends with consumer spending.

Global debt remains the primary obstacle to strong economic growth and is compounded by poor political policy and a regulatory environment that is burdensome and ineffective. The size of government is far too large and the cost of supporting it is a burden on American consumers and corporations.

Inflation remains benign despite the US economy now at or near full employment. Central bank policy continues to be accommodative but is gradually turning toward neutral. The Fed has now raised rates twice as it works to bring policy back to normal.

Washington policy remains the wildcard with much still unknown about Mr. Trump’s plans. Trump has talked a good story but can he deliver? America needs better trade deals, better protection of its products in the global markets, and objective leadership. These problems are not new and we have not had a president in decades willing to take on this sort of challenge. Mr. Trump seems serious about his plans for significant change and is surrounding himself with a cabinet of accomplished business people to help him achieve his goals.

Historically, Washington has not had much impact on the economy due to politicians inability to increase confidence. The White House’s biggest hammer lies in its ability to foster confidence so Americans will spend and consume. The President along with the Congress can also be effective by creating a fertile environment for economic growth. This means favorable trade deals and just the right amount of regulation for fair competition.

The markets will likely move higher as Mr. Trump continues his plan of change.

We remain optimistic.

November 25, 2016

POST-ELECTION TRUMP LOOKS A BIT DIFFERENT THAN PRE-ELECTION TRUMP.

Industrial and Defense Stocks have led the Market to new highs as consumers and investors have embraced the post-election statements of Mr. Trump optimistically.

Mr. Trump’s poise and dignity, that seemed lacking throughout the campaign, has emerged, and as a result optimism as developed throughout America and the world. Financial markets have rallied globally. The Dow Jones industrial average broke 19,000 for the first time and most industrial based stock indices are at new highs. Contrarily growth indices have encountered fear-based obstacles and have lagged the industrial based leadership in the market. Since the election defense and aerospace, heavy construction, and bank stocks have led the market and have advanced double digits, despite virtually no confirmation from Wall Street analysts with higher revisions to earnings for these groups.

Wall Street analysts are almost always late to the party and their earnings expectations generally lag investor’s intuitive moves in the market. These Intuitive forward-looking investors unfortunately get things wrong more than right and one must wonder if the current moves in these industrial groups is well thought out. Will Donald Trump makes substantial investment in new weaponry for America despite America being $17 trillion in debt? Will that same debt prevent Mr. Trump from building the wall and rebuilding our infrastructure? Investors sold bonds and have driven up interest rates on US treasuries by three quarters of 1% since the election on speculation that America will spend trillions over the next four years on Mr. Trumps plans. These questions will remain unanswered for months as we await announcements by the Trump administration and the opponents of his agenda. In the meantime the markets will be volatile as the views of intuitive investors settle.

In the meantime economic data continues to tilt up toward. Consumer confidence continues to rise and retail sales and US consumption shows early signs of accelerating. The nation’s money supply (M2) has been growing above trend for several months and it is highly likely this blip in growth will lead to acceleration in consumption for the next six months or more. This will be a welcome change to the stagnant growth we have had for the last few years. It is not surprising that the market is moving higher given this improving economic picture combined with a president-elect who now looks Presidential.

November 15, 2016

The political maverick scores a victory and creates uncertainty for the economy and the markets.

The failures of our political leaders over the last decade ushered in an opening for Donald Trump to obtain the presidency. Trump cleverly realized this and seized on the opportunity. Trump’s campaign was full of rhetoric and promises seemingly made without true regard to what was achievable. Now that Trump has captured the presidency we will likely see an agenda laid out that is more realistic with what this country can afford and the Congress will accept.

Wall Street and corporate America was a strong supporter of Clinton as she promised the continuation of policy that they had grown comfortable with and sought to have continued. Several sectors of our economy received favoritism by the Obama regime that may not continue under Trump. The media and Wall Street got so caught up in attacking Trump by fabricating policies and extrapolating on policies they claimed Trump would unleash on our economy and the world, that they began to believe this nonsense themselves. Wall Street and emotional investors are now seemingly making poorly researched investments based upon the policies and rhetoric talked about during the campaign. As a result the four tech giants have declined by 5 to 10% since the election. Amazon has fallen over 9%. Fixed income markets have fallen 5% or more with yields on treasury rising by over 50 basis points. Emerging markets have fallen over 10%. Gold has declined close to 10%. Conversely Industrial stocks have gained over 5%. Biotech has gained over 12%. Small-cap stocks have gained 8%. Financial stocks have gained over 10%. The broader market as measured by the S&P 500 has risen 1.5%, the Dow Jones industrial average has risen 3.3%, and Concord’s Dynamic Growth has gained 0.2%.

While the markets have changed a bit overall, and quite a bit among sectors, the economy remains the same. The outlook for growth is still challenged with the growth in global consumption at the lowest level it has been in years.

Prior to the election the best growth in earnings for 2017 was expected from technology, healthcare, and consumer cyclical sectors, as measured by the consensus of Wall Street analysts and as evidenced in the weightings of our portfolio. Those expectations remain the same today but the recent market performance indicates that investors believe we are on the verge of a change in leadership in earnings for the year ahead. Experience has told us that markets become emotional in the short-term but eventually are fairly efficient at discounting earnings growth. Is the new leadership in the market an irrational emotional response to the rhetoric of the campaign of Mr. Trump? We suspect that this is true. Most presidents generally seek to move on their campaign promises, but this maverick is clearly known to not be accountable to previous statements or promises. Now that Mr. Trump has the presidency secured, information about his true intentions will start to emerge and the markets will react as that information leaks out. Further, it is not unreasonable to infer that some of the things Mr. Trump has promised will unfold. These things will likely include but not be limited to strong reforms to immigration, tax cuts for corporate America, de-regulation of the unfair handcuffs on small businesses, opening up more land for drilling and energy production, changes to trade policies with China and other emerging markets, healthcare reform that abolishes Obama care with a new program that centers more on lower prices from free markets across state lines, and a significant reduction in spending on entitlement programs.

I suspect that Mr. Trump will go to the American people with a plan to clean up the swamp in Washington with some sort of term limit legislation as well as tough enforceable legislation prohibiting self-dealing.

This is a lot for Trump to accomplish. Who will benefit if we are correct. It would seem like our exposure to small-cap stocks needs to be raised at the expense of large caps exposed to significant trade with China. Energy will benefit from less regulation and is already cheap given where the price of oil is today. Energy needs to increase in our portfolio and be reallocated.

The financial and industrial sectors were already expensive prior to the Trump presidency as investors pushed these areas up despite a poor outlook for earnings. With American government debt already at 15 trillion, the idea of spending another trillion or more on infrastructure may be re-evaluated by Mr. Trump. The selloff in treasuries and the rally in bank stocks is likely overcooked in the short term.

Overall, we do not expect a significantly different looking economy over the next few years than we have already experienced over the past few. We believe Mr. Trump will make change and will likely go down as a highly successful president but we believe it will take a second term to accomplish all of his agenda and make a significant dent in the problem we have currently with growth. There is simply no quick solution to our growth problem.

Labels: Economic Outlook, Investment Strategy

January 30, 2012

Tax Planning for Life Events - Inheritance

Heirs reckon with capital gains and income taxes

Many Americans find themselves landing on “Inheritance” as they course along the tax-game board called "Find the Money". Being an heir is a mixed blessing as you grieve the loss of someone close to you. Your inheritance may arrive with a strong emotional connection to your loved one, either joyful or painful. Maybe you’ll add it to an already healthy investment portfolio – or maybe you’ll need to spend cash and reduce financial strain.

In any case, knowing the tax consequences of your inheritance is important. Here we’ll consider typical inherited assets and the taxes associated with them.

If You Inherit Assets

If you receive a gift of stock or real estate, you’re likely to be affected by capital gains taxes. If Aunt Rose leaves you shares of General Electric (GE) worth $200,000, you’re grateful for her gift. But if you sell the shares, what would you owe in tax? Here’s how it might work for you:

Labels: Retirement Planning, Tax Planning

January 23, 2012

Tax Planning for Life Events - Highly Appreciated Assets

Sell an asset for profit and you'll pay capital gains taxes, right? Maybe.

As you move your token along the tax-game board called Find the Money, you land on the space labeled “Sell a highly appreciated asset.” Nice. There’s a lump sum of cash coming your way. But hold it there, Rockefeller – you only get to keep what’s left after taxes.

The things you own and use for personal and investment purposes are considered capital assets by the IRS. These include your home, collectibles, and stocks & bonds. If you sell a capital asset for more than you paid for it, you realize a capital gain. When you realize a capital gain, you’ll pay a capital gains tax. The tax you pay will be either a higher short-term rate for a one-year holding period or a lower long-term rate if you’ve owned the asset twelve months or more.

So, if you recently parted with the beach house you bought in 1966 and banked the cash, you’ll pay a 15% long-term capital gains tax. If you also sold the Warhol you bought for the housewarming, you’ll pay 28% in long-term capital gains tax since art & collectibles fetch a higher rate. Or if you sold the El Paso Corp (EP) stock yesterday at $27 per share that you bought last October at $18, you’ll pay income tax rates on the short-term gain.

I like a profit – but that’s a lot of taxes. Isn’t there a better way?

Glad you asked. There are other trails on the game board you might take before landing to the space labeled “Write a check payable to IRS.” Consider these options:

Labels: Retirement Planning, Tax Planning