Dear Clients & Friends,
As the stock market continues to go even higher into record territory, our strategy is shifting to a more “cautious” view. We will continue to buy stocks and equity funds, but we are also building up our defenses against the day when Wall Street’s grand old bull finally rolls over. Sometimes, it seems as if a market trend will never stop going up or down. This is how the current stock market has been behaving so far. The Standard & Poor 500 Index has not had a pullback of more than 2.8% all year. It is possible that this optimism is partly due to good economic fundamentals or maybe it is due to the Trump administration’s three point program for economic growth of healthcare reform, infrastructure spending and tax reform. Of the three programs, we all know that tax reform is the only one that has a chance of passing before the end of the year. The tax reform proposal which was announced by Trump last Wednesday seems to have pleased Wall Street with the idea that corporate taxes are coming down. We will have to wait and see how that process unfolds.
During the past eight years, if anyone was invested to any degree in a well-diversified stock portfolio they have got to be pleased and have enjoyed a substantial increase in wealth. However, we do not drive with our eyes glued to the rear-view mirror. Rosy or not, the past is the past. What matters now is what lies ahead. In that regard, the good news is that the U.S. economy is still among the most dynamic in the world. The American brand of free enterprise continues to generate great innovations, which will stimulate growth in corporate sales and profits over the decades to come. Self-driving cars, solar power on your rooftop, and so much more. Over a period of decades, or a working lifetime, investors in stocks will be handsomely rewarded.
The not-so-good- news is that today’s share prices of stocks, exaggerated on the upside by wave after wave of central bank intervention (“quantitative easing”), are probably too high for the amount of growth that will actually be registered in 2017-2018. In fact, if something should come along within the next year to trip up investors’ earnings expectations, the headline equity indexes could drop rather sharply. At the moment, the trigger for such an event is hard to specify. Unemployment remains near decade lows, and Gross Domestic Product growth plods along at around 2%, net of inflation. Yet we know that corporate debt levels stand at near-record highs, while the Federal Reserve is slowly ratchetting up borrowing costs. Meanwhile, in the consumer sector, the more cash-strapped members of the population are showing definite signs of economic stress. These members include subprime auto buyers, heavily indebted college graduates and credit-card shoppers who live paycheck to paycheck. Three or four quarters from now, enough problems may have accumulated to topple Wall Street’s long-running bull. In sum, the investment future looks promising over the long-term, but it will look a lot more promising if we can all mitigate the impact of the next cyclical market downturn.
During the quarter, we continued with our strategy of raising our cash levels by selling stocks and equity funds that could cause problems in 2018 as well as trimming equity positions that have significantly appreciated. We sold our entire positions in Dollar General Corporation (DG), Seacor Holdings Inc. (CKH), Scripps Networks Interactive Inc. (SNI), Stone Harbor Emerging (EDI), Spdr Bloomberg Barclay (ITR), Merk & Co Inc. (MRK), Royal Dutch Shell B Adrf (RDSB), Abbie Inc. (ABBV) as well as Vanguard High Yield Corp (VWEHX), and Gabelli Equity Income (GABEX).
The additional cash give us the opportunity to increase our Fixed Income portion by adding small positions in Public Service Enterprise Group Inc. (PEG), an energy company with operations located primarily in the Northeastern and Mid-Atlantic United States; Cisco Systems Inc. (CSCO), a company that designs and sells a range of products provides services and delivers integrated solutions to develop and connect networks around the world; Park Hotels & Resources, Inc. (PK), a lodging real estate company, which consists of 67 hotels and resorts with over 35,000 rooms located in the United States and international markets and Wells Fargo & Company (WFC), a diversified financial services company, provides retail, commercial, and corporate banking services to individuals, businesses, and institutions.
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 continued with our average asset allocation mix of 40%-50% Equity, 40%-50% Fixed Income and 0%-20% cash for most of the portfolios.
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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