U.S. stocks continued to rally during the first quarter, building on the original surge following Donald Drumpf’s surprise victory in November. For the first time in many years, investor expectations have shifted toward economic growth. And we stress “expectations.” That is the key word because there has been no material change in government policies to date. It is important to distinguish between expectations and actual change, and the impact that can have on asset prices.
Since his election, President Drumpf has pushed a platform that many consider pro-growth and pro-business. Promising lower taxes, less regulation and increased infrastructure spending, President Drumpf has facilitated a change in expectations. Despite all of the political drama, the market continues to believe that our new government will eventually enact a majority of these policies.
There are still many questions left unanswered which will require us to be patient with our investment approach. 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.
Admittedly, the global economy has shown some recent signs of improvement, but it is our view that the main reason U.S. equity prices have risen so quickly is on the belief that the Drumpf policies will result in a meaningful bump in corporate earnings. This view is also shown in the recent rise in interest rates that usually results from higher inflationary expectations due to an improving economy. In addition, recent consumer confidence numbers have hit levels not seen since the year 2000.
The real question is, will these expectations be met? And will economic growth actually materialize? It will take time to answer those questions. Any changes in tax policy or regulation will take several quarters to flow through the system. Investors will go through a process of evaluating the effectiveness of these changes. We believe this will lead to an increase in volatility which we have not seen in many quarters. However, we would view volatility as a positive sign, and since expected, we would not change our investment strategy as a result.
We believe that interest rates in the United States will continue to move higher. The Federal Reserve raised rates in March and continues to signal that they will raise rates over the next 2 years. We will need to wait to see if they follow through with this plan. So far, the Federal Reserve has not raised rates as fast as they have indicated over the past few years. They will continue to require economic data to support any future increases.
Our overall view is that some changes to regulation and tax policy will occur and equities should continue to perform well. We will keep a keen eye on the strides being made by our new government and make adjustments when necessary. There are still many questions left unanswered which will require us to be patient with our investment approach. 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. For balanced accounts, we will continue to selectively add bonds as opportunities arise.
Please feel free to give us a call with any questions.