| What an eventful November it’s been!
The month started out with a shock, as Donald Trump was elected President. None of the polls had him winning, and I doubt anyone seriously believed he would win. It’s possible Trump himself was shocked at his own victory. As we saw with Brexit earlier this year, the popular (logical/obvious?) vote was not the outcome we got. On the eve of the election, and also leading into the results, several of you reached out asking if your portfolios were well-positioned for the election outcome. And as I mentioned my last post, we let process dictate our investment strategy, not politics. Indeed, if you had let your emotions dictate your investment decisions, you were in for another rude shock. Instead of dropping after the elections, as was widely expected, the US stock market has been on fire. In fact, all the major US stock indices reached record new highs earlier this week – a feat not seen in 16 years. The confusion was compounded by a swift drop in bond prices, and a large spike in global yields. Truly, stock markets exist to make us look foolish! It seems the stock market thinks Trump will be good for the economy. While he ran on a somewhat distasteful platform of racial, gender-based and economic divide, a few of his ideas seem popular with investors. Trump is planning to lower corporate taxes, and has announced a tax holiday on $2.5 Trillion of cash held abroad by US companies. Typically, this money would be taxed at a high rate if brought back in to the US, but Trump has declared a one time tax of 10%. According to one highly optimistic analysis, this money could generate as many as 25 million jobs! Whether or not that is possible is a different question, but more money for companies will reflect positively in their share price. He’s also promised to simplify the tax code for individuals and from a cursory glance at his new tax tables, it appears he wants to remove the marriage penalty too. Trump wants to boost infrastructure spending. Our infrastructure is in sore need of updating and maintenance. This spending will also help boost the economy. He’s also in favor of fewer regulations, which typically help improve economic activity. (This increased economic activity sometimes comes at the expense of human and environmental health, but that’s a different discussion). So there are a few valid reasons for investors to rejoice. However is not all rosy. All this infrastructure will need to be funded with debt. And there’s concern the US deficit will spiral out of control – this has spooked the bond market causing bond yields to jump. Yields on the 10 year Treasury jumped from 1.85% to 2.3% in the past few weeks. Bad news if you’re in the market for a mortgage, since rates are tied to the 10 year. It’s even worse for long term bonds, like the 30 year. The yield jumped from 2.6% to 3%. When rates rise, bonds prices fall. The 20 year bond dropped 5.7% over 2 days last week – the biggest 2 day drop in it’s history. And if you’re retired and relying on government bond funds, the decline since July has wiped out several years worth of income. Meanwhile, these higher rates have strengthened the US dollar, which is bad for companies that engage in export, as well as for Gold, Gold mining stocks. Trump has also threatened free trade agreements which has caused emerging market stocks to decline. Overall, it’s a mixed bag. Luckily, our stock portfolios have held up quite well. They’re down slightly from the peak in summer, but still doing quite well. Along with the rest of the bond market, our close-end municipal bond funds have taken a bit of beating. But they are still positive for the year. Now is actually a great time to allocate more funds to this strategy, seeing as the discounts on some of these funds are reaching nearly double digits – something we haven’t seen in nearly 2 years. These funds are especially useful to those in high tax brackets as their interest payments are tax-free. Wish you all a very happy Thanksgiving! Nirav P.S: If you’d like to discuss your investment performance, or you’d like a complimentary portfolio review, just send me an email and we’ll schedule a time to talk. |