News & Notes
Trump, Republicans & The Stock Market
Donald J. Trump became our 45th President today. On this historic day we paused to watch the ceremony and now we move on to speculate what investors will do as the policies of this new administration take form. Time will tell if the Trump administration can implement all the changes promised since November.
Ronald Reagan said the most dangerous words in our language are “I’m here from government and I am here to help”. Reagan believed less government is better and government gets in the way of individual progress and economic growth. Donald Trump agrees and promises to reduce regulation, lower taxes and rebuild America. Trump’s unorthodox communication style and threat to change the way business is done in Washington has many on edge.
The longer the changes are debated before enacted, the greater the uncertainty and the more volatile the stock market. To offer a precise outlook is virtually impossible. We do not know what Donald Trump will say next or what legislation is likely to get passed in 2017. Both will impact stock prices as the dramatic change in administrations presents uncertainty. What we do know is that corporate earnings and profits ultimately determine stock prices. Rhetoric from Washington and legislation that impacts corporate earnings will play a large role in determining stock prices this year.
What is the case for a strong stock market? The market, meaning the S&P 500 Index, is not undervalued, trading at 17 times 2017 expected earnings. It is doubtful the market will have a positive year if corporate earnings remain where they are today. However, tax cuts would give an immediate boost to most companies’ earnings, which in itself could be the impetus to move stock prices higher.
A corporate tax cut, with a reduction in Federal spending or increased revenue elsewhere, would be positive for the market and provide opportunity for further stock price advances. Trump and the Republicans vow to take aim at some deductions and tax imported goods. We don’t know how all this will play out, but less taxes overall is good for stocks and reduced taxes tend to get passed on to shareholders in dividend increases and share buybacks. (more…)
Mary Bersot CFA Appointed to PCAOB Investment Advisory Group
Mary Bersot, CFA has been appointed to a three year term as a member of the PCAOB Investment Advisory Group. Ms. Bersot is CEO and Chief Investment Officer of Bersot Capital Management LLC, which she founded in 2006. Prior to that she was a Managing Director and Co-Chief Investment Officer of the Large Cap Team at Dresdner RCM (f/k/a Rosenberg Capital Management), managed stock portfolios for Taft Hartley Pension and Health Plans at McMorgan & Co, and served as part of Citicorp Trust of California’s global private bank. She began her career at Wells Fargo where she managed investments for some of the bank’s largest and most complex family trusts.
The PCAOB is a non-profit corporation established by Congress to oversee the audits of public companies in order to protect investors and the public interest by promoting informative, accurate, and independent audit reports. The PCAOB also oversees the audits of brokers and dealers, including compliance reports filed pursuant to federal securities laws, to promote investor protection.
The Sarbanes-Oxley Act of 2002, which created the PCAOB, required that auditors of U.S. public companies be subject to external and independent oversight for the first time in history. The SEC has oversight authority over the PCAOB.
The PCAOB Investor Advisory Group (IAG) provides views and advice to the Board on broad policy issues and other matters related to the work of the PCAOB that affect investors. The Board relies on the IAG to provide high-level advice and insight on matters the Board may face in fulfilling its mission to protect investors under the Sarbanes-Oxley Act. For more information see the PCAOB website, www.pcaobus.org.
2016 Stock Market Outlook
2015 came to a close with a whimper and 2016 opened with a bang! The stock market is down 5.9% after eight days of trading in the New Year. China’s stock market took a nose dive before trading was halted on two separate days. World markets followed, worried about slowing global growth and the dramatic fall in oil prices. Panic selling is hard to watch!
Fear that China’s economy is slowing added to the drop in oil prices as they have been a huge importer of oil and other commodities. There have only been three other instances in history when crude oil prices declined 50% in six months; 1986, 1991 and 2008. Today’s decline resembles 1986. It is rare for oil prices to drop this much without a recession. Like 1986, our economy is relatively strong while worries persist that global growth is declining. In 1986 small, undercapitalized energy companies folded and assets were acquired by stronger, more established companies. This should happen now with the price of crude below $34 a barrel. Companies like Chevron and Exxon are strong and could become stronger. In the meantime, with their stock prices down and their dividend yields over 4% it pays to hold or add to positions.
Are We There Yet?
Fear is rising as the market falls. We have been suspended in mid air, waiting for the market to break out of a narrow trading range. Suddenly, we break the range, stocks fall and anxiety rises.
We need to put things in perspective. The S&P 500 is up 104% in the past five years, 1.27% over the past twelve months and is now down 2.99% year to date. It wouldn’t be surprising to see a 10% decline before this is over as stock prices move more in line with earnings and expectations.
The market has not “tanked”. In fact, if we take a long-term view then this is positive. The market has been on a bullish tear for 6 1/2 years and a pull back is expected. Risk aversion is heightened and the good stocks get sold off with the bad. There is opportunity.