Washington has a way of watering down every new president’s agenda, and we believe practicing disciplined investment fundamentals is better than trying to figure out if this time is different. A top down review of the economy is a good place to start. Markets can trade short-term on speculation, hope and fear, but what makes markets go up and down over the long term are earnings and the business cycle. Corporate earnings have improved since the Great Recession, but consumer demand has not fully recovered and business spending has been weaker than historical averages (Morgan Stanley U.S. Economics research, Dec. 29, 2016, Jan. 4, 2017). With oil having stabilized and the election season behind us, business and consumer sentiment is improving. This should lead to better earnings if the dollar does not strengthen too much ( Morgan Stanley GIC Weekly Jan. 9, 2017). Rising interest rates can hamper expansion, but we believe that we are still early in the cycle. Corporate tax reform and a review and rollback of some regulations should be favorable for U.S. stocks (Morgan Stanley GIC Weekly Jan. 9, 2017). An improving U.S. economy could help spur global growth, which has been declining for the past few years. Tariffs and any potential trade wars would be a negative for stocks as the global markets are very dependent upon free trade (Morgan Stanley GIC Research Jan. 9, 2017).
2016 was a year of significant changes. Often times, what lags one year is a good performer the next year. We understand that given recent double digit returns, the motivation for waiting on the sidelines is often a result of investors feeling like they already missed out. We seek to review what areas of the market still offer attractive values and what their historical returns have been.
Every investment strategy needs to be tailored to the unique goals of the investor while properly balancing the relevant risks and rewards. The goal of a long-term investor should be to get invested as soon as possible, thus giving the investor the benefit of experiencing one of the most powerful forces in the universe according to Albert Einstein: compound interest. Most often we choose to recommend investment managers with broad mandates who are paid to identify those markets that are undervalued and attempt to avoid those that are overvalued.
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