QUARTERLY INVESTMENT UPDATE
4TH QUARTER 2016
Dear Clients and Friends,
Donald Trump’s upset victory in the presidential race came as a shock to millions of people. Few presidential elections have stunned so many observers as this latest one. Whether you were pleased with the result or dismayed, you were almost certainly surprised. Investors have displayed their confusion as well. Stock prices, interest rates and the value of the U.S. dollar have risen since the election due to optimism about likely pro-growth policies. Economic data has improved alongside a more business-friendly incoming Trump administration, helping to strengthen both stock and Treasury yields. Gas and oil prices are continuing to rise as more countries, including non-OPEC oil producing nations, agreed to cut their production levels. For the quarter, the Standard & Poor’s 500 Index closed at 2,238.83, up 3.3% for the quarter and 9.5% for the year.
By now, you must have heard the narrative a hundred times. Donald trump will slash taxes, scrap Obamacare, shred thousands of regulations, ditch bad international trade deals, rebuild America’s infrastructure and create millions of new jobs. The economy will boom and stocks will soar, even if inflation and interest rates do bounce back somewhat. We have no doubt that some of it will come true. However, not all of it will unfold exactly as today’s eager post-election stock bulls are assuming. Trump’s proposals as well as his appointments to high office will probably run into more obstacles than certain impatient investors are counting on. The Democrats are already sharpening their knives so that parts of the new administration’s program will get bogged down in Congress, the bureaucracy or the courts. We feel confident that we are not in for a smooth-as-silk economic ride under Donald Trump any more than under any other president.
Let us consider four policy changes Trump has proposed, and their likely effect on various investments:
As far as our investment strategy is concerned, we continue to maintain our standard two-pronged strategy, which is to maintain a substantial exposure to common stocks (and mutual funds) as long as there is a reasonable prospect for double-digit returns. Furthermore, we will continue to take profits more frequently so that we could gradually increase our weighting in cash as well as the fixed income portion of our portfolios. During the quarter, we continue to maintain an average asset allocation mix of 45%-50% Equity, 45-50% Fixed Income and 0%-10% cash for most of the portfolios. However, during the quarter, we increased our cash levels by harvesting some capital losses to offset taxable capital gains in most of our taxable accounts.
On the Equity side of our portfolios, we initiated one new position which is Melco Crown Entertainment (MPEL), a company that through its subsidiaries develops, owns and operates casino gaming and entertainment casino resort facilities in Asia. On the sell side, we sold our entire positions in American Express Company (AXP), Encana Corporation (ECA) and Union Pacific Corp (UNP).
As far as Fixed-Income is concerned, we also added two new positions to our portfolios which are Kimberly-Clark Corporation (KMB), a manufacturer and marketer of a range of consumer goods that has a current yield of 3.2% and Verizon Communication Inc. (VZ) which has a current yield of 4.33%. On the sell side, we sold our entire positions in Vermilion Energy Inc. (VET), Murphy Oil Holdings (MUR), Wells Fargo & Co New (WFC), Vivendi Sa Ord (VIVEF), New York Community Bank Co (NYCB), MetLife Inc. (MET), and Union Pacific Corp. (UNP).
We want to thank all of you for giving our firm the opportunity to serve you. We thank you very much for the trust and confidence you have placed in our firm as it is always appreciated. Please contact us should you have any questions or comments. Also, we want to invite you to visit our website at www.farmandinvestments.com for a quick Retirement calculator, our latest firm news, and Market Commentary archives.
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