Dear Clients & Friends,
Ninety-eight months and counting! Key U.S. stock indexes touched fresh all-time highs in mid-May, cementing the post-2009 bull market as the second-longest in the nation’s history. While it would be nice to believe the good times will roll forever, common sense suggests otherwise. Almost 48 weeks have now elapsed since the last 5% pullback in the Standard & Poor’s 500 Index – the longest such interval since the bull market began in March 2009. Chances are that we will get another 5% (or greater) dip possibly early fourth quarter, giving us an opportunity to fill most of the holes in our portfolios at prices more favorable than today’s. Even though we believe the bull market for equities will continue for 2017, the longevity of the bull market, coupled with extremely high valuations of some of the most widely held equities such as Amazon, Facebook, Netflix, etc., suggests continued caution regarding the overall risk of the stock market.
Politics is fading into the background and fundamentals are grabbing the limelight again. With the President’s economic agenda running into snags in Congress, investors are having second thoughts about making any money in 2017. The Trump administration has rolled back a number of regulatory impediments that hurt businesses under Obama. In addition, there is still a good chance the Trump team will eventually pass some kind of healthcare fix through Congress, together with an infrastructure program and tax reform. However, enacting these initiatives is taking longer and proving to be much more difficult than enthusiastic observers assumed at the outset. As a result, many of the stock market’s “Trump trades”, which had zoomed up during the weeks just after the election, have since fallen back to earth. For example, by Mid-April, bank stocks had given up all of their 2017 gains and backtracked to four-month low. Yes, it is troubling that the Trump-Comey-Flynn controversy has now led to the appointment of a special prosecutor. It is certainly possible that the proceedings to come will distract the attention of President Trump and prevent him from advocating effectively for his economic agenda. On the other hand, Treasury Secretary Steven Mnuchin was pushing for tax and regulatory reform, which he said would raise the economy’s rate of real growth to 3% a year. It is definitely too early to count the Trump economic program out.
As investors step away from the political-handicapping game, we can expect that old-fashioned fundamentals such as earnings, dividends and financial strength will reassert their critical role in determining stock market winners and losers.
At some point when the bear strikes, many of today’s high-flying glamour stocks, which lack a solid value underpinning, will come crashing down with little prospect of a decent return for investors who buy now and hold for the next several years. In an effort to avoid such an unhappy fate, we constantly review each of our portfolios to make sure they have the proper asset-allocation mix between Equity, Fixed-Income and Cash. In addition, we upgraded our bond holdings which increased our allocation of Fixed Income and we continue to hold excessively high cash levels in most of our portfolios.
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 changed our average asset allocation mix of 45%-50% Equity, 45%-50% Fixed Income and 0%-10% cash to 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.