As a Certified Financial Planner™ and Chartered Retirement Planning Counselor℠, I firmly believe that investments should follow a diversified portfolio that fits an individual’s unique goals, investment horizon, and risk tolerance. I focus my clients’ investments on a core strategy that attempts to reduce the risk from the unexpected. That does not mean that I will ignore foreseeable market trends. We can use the past as a guide and draw parallels to apply towards the future.
This year will see many changes. Last year’s election will have a large impact on the economy going forward. Some sectors have already reacted favorably, while others are expected to decline. One trend that will continue is ideological driven news. Depending on which political view you take, the information and news you receive can be vastly different from what others have heard.
No matter how you view the world, there will always be one universal truth: Reality does not care nor conform to our opinions. Another truth is that your money is hard earned. The last thing you should do is to throw it away based on speculation. Over the coming years, we’ll hear more “fake news” and hear unqualified opinions. I would not recommend basing financial decisions on this sort of information.
All financial predictions are best guesses based on experience and the information available. Short of using illegal insider information, there is no way to know how the market will move. Therefore, it’s extremely important that you vet the sources of information before making any financial decision. My outlook for 2017 is an opinion based upon my education, experience, and research which has been cited throughout this article. Before accepting any information on something as important as your finances, consider factors such as education, experience, expertise, or how the person may or may not benefit from any advice given.
2017 Market Outlook
The current market analysis seems to be split along party lines, though the economists who have more accurately tracked the market in the past currently hold negative views. Another consideration is the fact that we are currently in the second longest bull market run since 1945. Eventually, these market runs end.
The positive will be a lower tax burden enacted retroactively to January as well as deregulation which can spur growth. Already, the markets have reacted favorably due to this. Financial sector stocks have seen the largest growth since the election. I would expect to see growth in the Small Cap sector, as restrictive regulations are removed.
The new administration is poised to be business friendly, though not all businesses will be treated equally. As one would expect, the Republicans favor established people and businesses. I have already covered the tax changes proposed in a previous article so I won’t rehash that topic in depth. I will reiterate that these plans help the wealthiest Americans as well as our large corporations. Unfortunately, they are at the expense of the middle class and small businesses.
The shifting of the tax burden, in addition to increases in the Social Security tax, will begin to drag on the U.S. economy. This impact may not be felt by most people until 2018, but investors will have a better understanding of the new tax code by year end. Their concerns will be priced into the market near the end of the year. I do not believe that the tax changes alone will dampen the market.
The World Economic Forum is meeting in Davos Switzerland just days ahead of the 45th President’s inauguration. The theme this year is uncertainty. Uncertainty always hurts the stock market. This fact is the biggest problem one will face when it comes to investing for 2017. We know that the bull run will come to an end. We know that there will be changes to the tax code. What remains uncertain is when and how these changes will impact our economy.
The 2016 election was a referendum against the establishment. So far, the Trump Administration is showing that it will not follow the rules of the past. Progress and change are an important facet of life. In some cases, however, it is prudent to conservatively stick to tried and tested rules. One of those rules is to retain and promote competent leadership. The Trump Administration seems to, at this point, be ignoring that rule.
At the time of this writing, the Presidential Inauguration is a day away and the new administration’s cabinet appointees are before Congress. The choice for Education Secretary lacked the necessary experience to run the department. The Energy Secretary Candidate once vowed to eliminate the department he will now lead. The choice for heading the Environmental Protection Agency has sued the agency several times. The choice to lead HUD has never held public office nor does he have any experience heading an agency like the one he will lead. The nominee for Treasury Secretary forgot about $100 million in assets he owns.
Putting politics aside, from a purely business standpoint, these choices reek of unnecessary expenses. You first should factor in the learning costs for these leaders. Next, add in the costs of mistakes stemming from inexperience. You will need to account for lower productivity as a result of lowered employee morale. Finally, you cannot discount the cost of litigation that is bound to come against these leaders who have openly opposed the jobs they are required to perform.
Hopefully, this new leadership will surprise us with success. History has shown otherwise. The majority (90%) of small businesses fail due to mismanagement and incompetence. These failures will cost our economy. The Trump Administration plans on massive spending projects such as expanding the military and constructing a border wall. Previous Republican administrations have both promised tax and spending cuts. Unfortunately, those administrations only followed through with tax cuts, leaving us with deeper budget shortfalls.
This leads us to believe there will be a massive deficit explosion. The 2017 tax proposals add an additional $6 trillion to the deficit. Repealing the Affordable Care Act will not only take health care away from millions, it will create 3 million lost jobs and cost $1.5 trillion. Rather than pass on cuts for wealthy Americans, the nominee for Treasury Secretary proposed changing how the tax cuts are measured in a controversial process known as ‘dynamic scoring’.
Prior to the Great Recession, the government acted similarly. While some would like to rewrite this history, reality cannot absolve them. These failures are not even a decade old, yet the new administration seems unconcerned about repeating these mistakes.
The factors cited are cause for concern going forward. If you’re among the wealthy, the overall economic conditions may negate any tax savings. Middle class investors will be squeezed by tax hikes and a dropping investment market. This is the reason the majority of economists warned about proposals made by Trump prior to the election.
Phoenician Financial Planning’s Investment Strategy
Your strategy should remain, at its core, a diversified allocation. I am focusing this on well established, large value oriented companies that tend to remain steady during uncertain times. Even with the potential for higher returns for the early part of 2017, I believe that avoiding small companies, which are prone to failure first during market turns, be avoided. The reason is that it is hard to time the market, and you may miss selling these securities at the right time if there is a sudden market move.
I plan on holding off on emerging markets for the time being. I am looking for established Asian and European markets as a potential profitable alternative if problems in the U.S. markets materialize.
The Fed has proposed interest rate hikes, which lead me to believe the use of lower yielding, short term bonds prudent. Finally, many of the new administration’s proposed strategies for border protection and domestic growth are inflationary in nature. Both gold and inflation protected treasury investments will be used to hedge against that issue.
Only clients of Phoenician Financial Planning are privy to the investments selected. The investment process takes into account overall diversification, risk tolerance, and individual investment time horizon. Market research is gathered from a variety of industry sources. Once market assumptions have been made, core investments are made with satellite investments suited to the foreseen market conditions. The funds selected are on a quarterly basis. Changes are made as needed and appropriate.
We may not be able to predict the future, but we can help you plan for it.