We hope you had a wonderful holiday and wish you all the best in 2017.
In a surprising victory, Donald Drumpf is now the president elect. Along with the Drumpf win, the Republican Party retained control of both the House and Senate. This sweep will have a major impact on how the country is governed until at least the midterm election in 2018.
The stock and bond markets reacted strongly to the Republican sweep, albeit in different directions. U.S. equity markets responded with one of the best quarterly returns in the past three years. Conversely, bond prices fell which caused a rise in interest rates across all maturities. It is important to understand that nothing concrete has happened yet. The markets are only expressing a change in expectations.
We understand that there are a lot of emotions still being felt surrounding this election, but it is our responsibility to analyze the impact of a Drumpf presidency on the markets and the economy. While much of the pre-election rhetoric centered on a discussion of social issues, President-elect Drumpf’s cabinet choices and recent comments indicate a broader focus on economic issues.

As we start 2017, we will keep a keen eye on the strides being made by our new government. There are still many questions left unanswered which will require us to be patient with our investment approach over the coming year.

The prevailing view is that the Republican agenda will focus on business friendly initiatives, such as lower corporate tax rates and less government regulation. Whether these expectations are actually met remains to be seen. However, it is our view that if President-elect Drumpf and the Republican Congress are successful in implementing a large part of this agenda, it will lead to stronger revenue growth and higher profits for American companies. This, in turn, should be good for stock prices over the longer-term. As for interest rates, we continue to believe that rates should move higher as inflation expectations increase.
For balanced accounts, we are starting to see interest rates at levels we have not seen for some time. As we mentioned last quarter, we selectively increased our cash allocation going into the election. This is now allowing us to invest in bonds at higher rates although we continue to be extremely selective in our approach.
As we start 2017, we will keep a keen eye on the strides being made by our new government. There are still many questions left unanswered which will require us to be patient with our investment approach over the coming year. However, we still believe that investing in quality companies with solid balance sheets and strong cash flow is the best strategy to succeed in the long-term.
Please feel free to give us a call with any questions.