January 2017 PCM Newsletter
Irvin G. Schorsch III
Surprise! Who would have thought that the election of our new President would have such a dramatic impact on the markets, 60 days before the inauguration? Media and investors alike were not prepared for a Trump presidential victory, Britain's departure from the European Union (Brexit) or the financial markets' reaction to such events. From the vantage point of Wall Street strategists, there is hope, and plenty of it, according to the Barron’s survey of prominent strategists at major investment banks and money management firms. Collectively, they see stock market returns up an additional mid‐single‐digit from where the U.S. markets closed December 31st. Corporate America may get a significant boost to profits, if Trump and Congress are successful in lowering corporate tax rates, repatriating significant corporate profits from overseas, increasing infrastructure spending and reducing regulations with the help of a Republican‐controlled Federal government.
While U.S. equity markets advanced instantly in response to the U.S. presidential election, other unforeseen consequences included the equally‐rapid rise of our nation's currency to an all‐time high against the Euro and interest rates rising significantly, especially for the U.S. 10‐year treasury note. Foreign financial markets also gave back some gains earned earlier in the year, due to weakening currencies relative to the stronger U.S. dollar.
One of the main burning questions remaining when President Trump takes office is will the elevated expectations since election day be met? Should reality prove disappointing, the market could be vulnerable to volatility later in the year. The U.S. stock market is now trading at 19 times last year's earnings. This level is clearly above the historical median, but not unreasonably high in light of the expected economic expansion.
Economists feel the current improving economic momentum can be expected to carry forward into the second half of 2017 and into 2018. Wall Street is forecasting relatively strong earnings growth for S&P 500 companies in 2017.
On the bond front, many economic forecasters are looking for the U.S. Federal Reserve to raise interest rates three or more times in 2017. The more conservative outlook is for two 0.25% hikes this year. Furthermore, differences in economic and monetary policies between other countries and the U.S. should continue to influence relative bond market performance in 2017. Evidence indicates sluggish global economies may constrain upward pressure on U.S. rising interest rates.
As you know, we made the determination that with the election of Donald Trump as the new president, and his strong focus on business, that shortening up bond maturities and duration were advisable for our clients. Bonds are an important component to every portfolio because portfolio construction isn’t just about returns; it’s also about diversification and downside protection (i.e. offsetting potential losses in stocks when periods of disappointment are experienced in corporate America). The net result for clients has been to maintain your bond positions, albeit with much shorter maturities, to protect your portfolios against rising interest rates, which are likely if growth levels improve or inflation rears its ugly head. We are watching closely and anticipate many surprises in the media and investor behavior, as our new President officially takes the reins.
Our team at PCM looks forward to an exciting year ahead, and believes we are well‐prepared to address this year's opportunities and challenges on behalf of our clients. We wish you the very best in health, happiness and continued prosperity in 2017.
Irvin G. Schorsch, III
Founder & President
In 1995, Irvin Schorsch founded Pennsylvania Capital Management with the entrepreneurial vision to build a firm centered on the client first and foremost, and to help people crystallize their thinking about the future of their lives and financial goals.