1st Quarter Client Note

The “Trump Bump” continued unabated in the first quarter. The S & P 500 (total return) Index gained 6.07%; tacking on to the 3.82% increase in the fourth quarter of 2016. In a reversal from last year, the gain was led by growth stocks, which were up 8.91%, while value stocks gained 3.27%. The S & P 500 has gained 17.20% over the past 12 months.

(For an interesting commentary on whether the bull market we are currently enjoying is eight years old or really only just four years old, check out this piece by Barry Ritholtz.)

A broad decline in the value of the US dollar vs. other currencies lifted the returns of international stocks for US investors.  The MSCI Developed Markets (net dividends) Index rose 7.86%. Emerging markets were the star performer, rising 11.44%. Foreign stocks have underperformed their US counterparts for more than a decade, fairly typical for some of these cycles. Are we in for a change in the long term trend? Stay tuned.

On the whole, the market is eerily serene. The Dow Jones Industrial Average had its quietest quarter since 1965, with an average daily move of just .3185%. The CBOE Volatility Index recorded its second lowest quarterly average on record.

Fixed Income

The Federal Reserve Bank raised short term interest rates in March, in what is believed to be the second of several such moves over the next few years – assuming the economy continues to perform well. Nevertheless, the yield on the 10-year Treasury note decreased 5 basis points. The Barclays US Aggregate Bond Index rose 0.69%.

As usual, we have a comprehensive review of the markets in the Quarterly Market Review from our friends at Dimensional Funds Advisors; including a nice metaphor for portfolio diversification as “investment shock absorbers” to brace the bumpy ride on a long road trip.


The big question remains as to what will be the impact of the Trump presidency on the economy and the markets. Will the “Trump Bump” be sustained or fizzle? Does the economy have enough slack to actually grow at the administration’s goal of 4%?

Is the inability, thus far, to pass a repeal and/or replacement of the Affordable Care Act a portent of things to come? This is especially important on the question of tax reform, which could now take much longer to pass and be less dramatic in its scope than originally anticipated. One large sticking point is the proposed border adjustment tax on imports.

It is easy to focus on the potential benefits of tax cuts, infrastructure spending, deregulation and arm twisting while ignoring the risks of protectionism, possible trade wars or an international crisis.

And it’s always hard, in any event, to make direct links between the policies of presidential administrations and the direction of the economy and markets. Psychology (optimism vs. pessimism) may have more of an impact than fundamentals.

Something to watch out for would be if the allegations around the Trump campaign and Russian interference with the 2016 election were to devolve into a genuine scandal with impeachment implications. During Watergate (the Senate hearings began on May 17, 1973), both the bond and stock markets fell precipitously until the resignation of President Nixon in August of 1974.

Beliefs, Balance and Buffetology

One thing is for sure: letting one’s political beliefs overly influence investing decisions is a great way to lose money. No matter which side of the fence you are on. The best bet is probably to make very little adjustment to your long term plan – assuming you have one. That includes maintaining enough liquidity in your cash bucket to get you through a prolonged period of market declines; which could come at any time, under any president, for any reason – or for no reason at all.

Dealing with risk and uncertainty is the main challenge for investors. Diversification – within and among asset classes – has provided investors with a well worn strategy to manage the challenge. The so-called experts are rarely right in forecasting which individual stocks or asset classes are likely to outperform. The market incorporates all their forecasts, anyway. Manage your saving and spending – the things you can control. And rebalance your portfolio when your asset allocation materially diverges from your strategic allocations. Which is easy, if you’re either in the saving or the spending mode – just use deposits or withdrawals to balance out your allocations.

Speaking of the role of forecasting, this time of year gives us an opportunity to hear from Warren Buffett, who, for the Berkshire Hathaway annual meeting always manages to add some aphorisms to his long list. He’s not known as the Oracle of Omaha for nothing:

“If 1,000 managers make a market prediction at the beginning of a year, it’s very likely that the calls of at least one will be correct for nine consecutive years. Of course, 1,000 monkeys would be just as likely to produce a seemingly all-wise prophet. But there would remain a difference: The lucky monkey would not find people standing in line to invest with him.”

Monkey on Google Android 7.1

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