4th Quarter 2017 Newsletter
2017 has been a record breaker for domestic equities, closing with the second longest bull run to date. The last time the S&P slumped 3% or more was November 2016, according to CNNMoney Invest. Not surprisingly, many analysts and market prognosticators are predicting a significant correction, or even a “crash” being imminent. As we write this the Super Bowl is just days away; and so, making the rounds again is the superstition dating back to the 70’s, that a win by the NFC will be bullish, and a victory for the AFC will bring on the bears in the market. We always find it interesting in January to look back at headlines and market reports over the past year, recalling what “the market” was worried about happening, verses what did happen. It reinforces our belief that we better serve our clients by watching the reaction and having a game plan to handle it, opposed to anticipating what is about to happen.
In 2017, real GDP (gross domestic product) grew – up 3.2% in the 3rd quarter, and (an advance estimate) 2.6% in the 4th, according to the Bureau of Economic Analysis. Spreads between the yield on 2yr Treasury notes and 10yr treasury bonds is currently the lowest since the Financial Crisis of 08-09. The Fed has continued a cautious schedule of rate increases. Europe has rebounded economically; Franklin-Templeton funds reported earlier this month that Eurozone unemployment is below 9% for the first time since 2009.
While logic tells us that a significant correction is overdue, fundamentally there are many positives.
- Technology advances are helping to boost growth for the companies engineering them, but also operations that utilize their products.
- Business should benefit from the new tax law. Tax specialists are still digesting and interpreting features, and some of the ultimate benefits may not be priced into the market yet.
- Several companies have already announced significant year-end bonuses and cash benefits for their employees. Early reports from tax analysts say most consumers will experience a modest savings in taxes for 2018; this could continue to fuel a level of spending which has been robust during the fall and early winter.
On the bond front, municipal bonds with investment grade ratings continue to do well. Only U.S. treasuries enjoy a higher rating than quality municipals. Tax free income will continue to be valued by investors even with tax cuts. The Alternative Minimum Tax has been changed. Elimination of some itemized deductions, and caps on some others, should result in fewer people being subject to AMT; and the allowances for single and joint AMT filers has increased significantly. Typically, AMT muni’s have offered higher relative yield than non-AMT’s; there may be value there for taxpayers who will no longer be subject to AMT or will see a significant drop in the AMT tax due.
We encourage you to talk to your tax professional when preparing to file this year about how these changes in the tax law may affect you in 2018. We are busy studying the subject and preparing to help you with tax planning as we go through the year. If you haven’t already given us written authorization to discuss your investment accounts with your tax professional, please consider doing so now. Having written authorization on file allows us to help you handle gathering and reporting the data needed to your tax professional.
With the Patriots again in the Super Bowl, New England fans are fired up -which is a good thing during the bitter cold spells we’ve been experiencing. The likelihood of their making it to the Super Bowl this year may be similar to the odds we would experience a stock market run such as this. We suspect that whether the bulls or bears prevail in 2018 will have nothing to do with which league wins the Super Bowl. But it can’t hurt to say, “Go Pats!” Whatever you do in your leisure time this quarter, we hope you stay warm and safe, and enjoy yourselves. We appreciate your trust and your business; and we look forward to serving you in the months ahead, whatever 2018 brings.
Warmly;
The Galarneau Group
