The Markets continued their upward movement this last quarter and half way thru the year the broad Morningstar stock Index is up 9.16%. This letter could be pages longer discussing, Amazon's purchase of Whole Foods, the State of Illinois multibillion dollar funding/debt problem and its potential effect on the Municipal Bond market, European cyber-attacks, the changes that Rex Tillerson is having at the state department, the changes at the Veterans administration or how the Federal reserve plans to shrink its very bloated balance sheet and how all these things affect our investment markets. For the sake of brevity I will only discuss the first two.
Market valuations are high and, many economist believe; and I tend to mostly agree, they are justified because you're other options are so poor. If you look at the bond market (loaning money to others; corporations, our homes, cities, water districts, hospitals, states, the federal government and others) the interest you earn is so artificially low you don't want to invest there. They will remain low until the aforementioned bloated Federal Balance sheet is reduced. Your other options are Real Estate or buying and running a business which requires your active participation. Add to this your risk and liquidity issues and the stock market seems reasonable. Another thing to consider is that the markets track closely with earnings. Earnings are up 14% and the market is up around 15%. At the cost of sounding like a broken record staying the course is most likely the best option over your investing life.
On to the state of Illinois. What a mess. It is hard to access who is more at fault the politicians or the citizens who elected them. They have gone 3 years without a budget and are spending 4 billion per year above their income. To quote a tax policy center in Illinois:
"Money-hungry politicians perpetuate the state's spending problem with higher taxes and more borrowing. Meanwhile, the state's tax base continues to erode as tapped-out families and businesses move to states with more opportunities and friendlier business environments." Like most issues it is complicated and with $127 billion of total debt they are in so deep that there are no easy fixes The effect on the schools, police, fire, pensioners, and the Municipal Bond market is going to be interesting. I am so glad we have TABOR in Colorado to try to avoid this very thing. We are watching the Municipal Bond market and are avoiding the Illinois debt as best as
we can. The municipal market, as a refresher, is given Federal tax exemption to encourage investors to fund things like water districts, hospitals, and roads for the public good. They are almost always considered safe (investment quality) as they are backed by the people of the state issuing the debt. We have seen what happened in Detroit and it is about to happen again in Chicago and the state of Illinois as well. In this case unlike Detroit a city, this is the entire state of Illinois. States are not allowed to declare bankruptcy and morally they are obligated to pay the workers their pensions and wages. What happens when the money runs out? How the courts treat the bond holders many of whom are the very pensions of the state employees will have big implications for other states who wish to borrow and the willingness of investors to commit funds. A Federal bailout would be outrageous and I don't see it happening. Stay tuned.
Amazon's $13.7 billion purchase of Whole Foods is the beginning of the changes we will be seeing in the very near future. Artificial intelligence, self-driving cars, internet medicine, and food delivered to the house like our milk used to be. When asked about Amazon buying Whole Foods before it happened the CEO Mackey was quoted as saying it would be "Amazon's Waterloo". He was referring to the fact that the food industry is such a low margin business there could be no upside. This makes total sense until you realize that Bezos, Amazon's CEO, has sent Blockbuster, Boarders, shoe manufactures and others packing with unexpected efficiency. In many ways it is a new Sears using Amazon Prime and Alexa as your catalog and the 450 + Whole Foods locations as your distribution centers in upscale neighborhoods across the U.S. in one swift move. The disruption to the food wholesalers and other retailers could be significant. Kroeger, Costco, Dollar General all fell 5% within an hour of the announcement. For those of you who already have Alexa you could be watching your Netflix movie and hit pause and tell Alexa to add a dozen eggs and some brownie mix to next week's food delivery. With all the changes a lot of people worry about the future, but I will point out that there were a lot of candlestick and buggy whip manufactures who all found a better life with innovation. We will continue to keep up on which companies are whip and candle makers and find reasonably priced businesses to invest in. In closing Kathy, Keith, Bill and I thank you.
Willis G. Ashby, CFP®