2016 Third Quarter Client Letter

October 2016 Excerpts

Enclosed is your Investment Report for the most recent quarter ending September 30, 2016.

The S&P 500 was up 3.3% for the quarter. Virtually all of the quarterly gain in the stock market came in July with August and September being quiet and a little negative. Meanwhile, the bond market was also quiet with the return for the Barclay’s Intermediate Bond Index at .16% and the U.S. Treasury 90 Bill returning a whopping .12%.

In your stock portfolio, technology stocks including Apple, Microsoft, Symantec and Corning increased in price between 14-22%. The tech sector gain was 10.6%. Unfortunately, several of the health care holdings, most importantly CVS Health, offset some of the positive tech performance. Political discourse is the main culprit for the losses. The positive fundamentals in your healthcare holdings have not changed.

Bond yields continue to be low as seen in the 10 Year Treasury yield of 1.6% at quarter end. Do not expect these low interest rates to change any time soon.

Going Forward

The pattern of slow growth and low interest rates continues. The breadth of this recovery remains narrow with the consumer and housing leading the way.

Demographic changes, an area in which government has little influence, are having an impact on the economy. While we are currently experiencing the graying of the U.S., and even more so in the developed world, I think it is important to also be mindful of the direction of younger generations and of their influence on future markets.

As an aside, one of my book groups recently read “Mr. Penumbra’s 24 Hour Bookstore” (Sloan) which led to a lively discussion. Within this fantasy read is a clear example of the clash between the provincial, what is ahead of us, and how old and new access to knowledge can come together to solve problems. (Think books vs. Google.)

Returning to a more serious topic, we see the upcoming election as a major risk to the market. No matter who wins and depending on the new congressional makeup, there will be a period of uncertainty with which to deal. This is, of course, more truth for a Trump victory with his bold and ambitious plans for economic and foreign policies. Historically a Democratic victory has been more bullish for the market.

Currently, the list of concerns for the market is longer than usual. Here are a few items:

  1. Election risks in the US this year and in Europe next year.
  2. The implications of more populist governments and their anti-business policies.
  3. A very high debt burden globally as a result of very low interest rates but little allocated toward capital investments.
  4. The implications of an end to the current low interest rates, and risk around how central banks disentangle themselves from the role they have been playing since the beginning of the 2007 crisis. (Since 2009 investors have had high confidence in the Fed to support stock prices.)
  5. The markets’ day by day response to passing events and comments from central bankers and rumors from the oil patch.
  6. China’s economic slowdown along with its real estate bubble and huge corporate debt.
  7. Aging demographics in the developed world as 1.5 million boomers turn 70 each year with many lacking sufficient savings for retirement.

Macro fears are not new and it is important to keep them in perspective. History is littered with surprises and unexpected events. Our investment intentions for now are to take selective risks, diversify more broadly, and have tighter limits on what could initiate stock sales. We plan to make sure your portfolio has a more than average amount of cash leading into this election or another “event” risk. Oh, and yes, turn off the shrieking media periodically.

Linda A. Mundy