Happy New Year to all clients!
As we say goodbye to 2016, we exit a year of uncertainty and volatility. Initially, markets expected four interest rate hikes by the Fed, which resulted in the S&P 500 Index dropping over 12% by mid-February. Markets recovered by mid-March. However, when the British announced they were leaving the European Union on June 23rd, the S&P 500 tumbled 5.3%, while the interest rate on the 10-year treasury declined to 1.37%, a level not seen since the 1960’s. The S&P 500 quickly recovered and hit an all-time high on July 11th but then stagnated. The rest of the year through November 8th was consumed by a contentious presidential election.
The table appears to now be set! Since the election, equity markets have risen, while long-term bond prices have declined. Consumer and business confidence have surged, as President-elect Trump’s policies are expected to be pro-business. By far, the most stimulating impact of the change in leadership may be cuts to corporate tax rates. President-elect Trump and the Republicans have both proposed cutting corporate tax rates. Either plan suggests corporate earnings may rise another 10–15%, but it remains unclear exactly when tax cuts may take effect. When corporate tax cuts do materialize, it will completely change stock valuations, as equity markets move from being over-valued to under-valued, relative to long-term averages. Timing uncertainty of any tax cuts means they have yet to be factored into earnings estimates. We believe small and mid-sized companies may reap a disproportionate share of the tax benefit because most of these companies pay higher US tax rates, since they do not have significant international sales and earnings.
Haven will continue to closely monitor developments to take advantage of market dips as potential buying opportunities. We will also continue to search for high-yield bonds with short maturities, like those we successfully purchased during 2016. The short-term nature of these bonds provide protection from rising interest rates, while still providing a competitive return for our clients.
We look forward to the new year and wish every client a happy and successful 2017!