Third Quarter, 2016 Review
“To me, the smart money is patient money.”
The above quotation is from my quarter end report of a year ago, a year that was not particularly happy for our clients nor for stock investors in general. 2016 is a better year, proving the wisdom of investor patience. This year began with a mini bear market for stocks, but a rebound has been gaining momentum since February and saw equity indexes break out to historic new highs this summer.
Interest rates remain near historic low levels both here and in other western nations. This behavior is remarkable, given a steady stream of fear-generating headlines from the media: we were told that interest rate increases would hurt stocks, we were told that Great Britain leaving the Euro might throw both England and Europe into recession. We were told that a populist turn away from free trade signals a coming economic slowdown. In the last week of the quarter, challenges facing two major banks, Wells Fargo and Deutschbank, meant to some crisis promoters that we were experiencing a return to the perilous bank meltdown that led to the Great Recession. As Lou Rukeyser, a long term Bull used to say on Wall Street Week, sarcastically, “You betcha!”
The objective of the Media is the generation of fear and viewership. This frequently causes panic for some nervous investors, often people who try to do the job themselves. Our job is to generate decent risk adjusted returns and drive client portfolios ever forward, headlines be damned! Despite the endless negativity of financial media, U.S. stock indexes repeatedly achieved record highs this past summer. The joy was widespread: Europe, Japan and India were positive for the quarter. More to the point, U.S. equity indices achieved new highs even when adjusting for inflation – a monumentally bullish phenomena! Your gains so far have been modest, given my penchant for caution. Exposure to high yielding fixed income investments means that most clients now own some preferred stocks yielding above 6% per year dividend returns. Further, some key common stock holdings soared during the quarter. Not surprisingly, some holdings weakened a bit. Even those shares that failed to catch the wave higher have given no signal of fundamental problems, so my confidence in our client portfolios is strong.
The remainder of 2016 has myriad uncertainties, not the least of which is the outcome of the U.S. presidential election. Markets appear to have resigned themselves to a Clinton administration. While viewed as unfriendly to business, a relatively predictable regime is seen by many as preferable to the disruptions that would result were a Trump administration to begin tearing up long standing trade agreements. Should the markets’ prediction prove correct, I believe we will continue to muddle along, with an economy that represents a contest between the needs of two generations: Millennials want growth and job opportunities combined with social and environmental sensitivity. Retiring Baby Boomers seek to achieve a secure and risk free retirement nest egg. Both impulses have softened the impulse to speculate among the Investor Class. This likely means we can avoid a Boom-Bust cycle for a long time. Employment is high, jobs are opening up for Millennials Gary Miller, CFP™ [1] MasterCard (MA) a holding that benefits from rising consumer spending, achieved a new all-time price high recently, a sign that people are spending, which in turn is usually a sign that people are working and have reasonable levels of confidence in the future. [2] Spending by states for infrastructure projects that might boost economic growth is suffering due to diversion of funds to cover burgeoning state pension obligations. See recent LA Times Article “This Pension Deal Cost Californians Billions of Dollars”
