I hope you enjoyed our holiday season. The markets have continued their upward momentum. The broad Morningstar Index was up 21.47% for the year. The FANG companies (Facebook, Amazon, Netflix, and Google) were all up an amazing 50+% except for Google which was up a mere 35%. The question I hear most is, "How is this happening and will it continue?" I think there are several things causing this. We are in the very unusual economic situation of having very low inflation and full employment. Historically as we reach full employment inflation tends to rear its sometimes-ugly head with the effect of keeping our spendable net income from rising and thus our life styles stay where they are. With no inflation our net spendable income rises. We are financially better off. We feel wealthier "animal spirits" (see below). This starts/causes a virtuous cycle of us spending more, business profits go up, the market goes up, our investments go up, we are "better off" and repeat.
Another cause is reflected by the small business owner's optimism index. It is the 2nd highest ever recorded. Finally, the prospect of a government not hostile to business has released the aforementioned "animal spirits". To answer the second part, "will it continue," while I will not pretend to know, my guess is that it will. The last major tax reform bill took almost 2 years to become law in 1986. Unlike the attempted repeal of the ACA the recently passed tax law had been in the works for a long time before it saw the light of day. While the potential benefits are large, only time will tell how the tax bill will actually affect the economy. From 2004 to 2016 we had 4,700 companies leave the U.S. to be in more tax friendly environs. While I cannot find the number of jobs, it is significant. We may see reverse inversions where companies move back to the U.S. Next, companies will start stock buy backs which will keep the buying pressure on, again good for shareholders, and the markets in general. Not talked about in the news is the leveling of the playing field between renters and home owners. Essentially you were penalized for not buying a home because of the mortgage interest deduction. The increase of the standard deduction will give all the renters the benefit of not only tax simplification but the reduction of their taxes as if they were homeowners. This is a huge benefit for this section of the population. Per the census bureau this affects 42.9 million renters. Home construction, oil exports, manufacturing, and planned hiring are all up, add optimism being high, I think the markets will continue to rise. We will be watching the earnings reports and will act accordingly.
What about Bitcoin? What is it, and will it stay? Bitcoin is a digital cryptocurrency based on "block chain" technology. Go to TED Talks www.ted.com and search "cryptocurrency" there are several talks. I don't know if Bitcoin will survive but the technology is here to stay and will become mainstream over the next decade. I remember Bill Gates speech where he first talked about the internet and how it would change things. For the life of me I did not see what he saw. I think block chain currency will be similar. If you go back in time to ancient Italy the currency was created by the great houses. So Florence had a currency and Naples had a currency, etc. They were backed by the assets of the "house/bank" and the coins were copper, silver, or gold. Just as these currencies were replaced by the expanding Roman Empire so could our US dollar. Do not panic this is not happening until we have a rather major shift of the dollar being valued in cryptocurrency. Bitcoin is currently valued in dollars or Euros. Very few places accept Bitcoin as payment. The question of what is backing the currency is another major issue? The U.S. Dollar is backed by the U.S. government and ALL its citizens. When the banks and or governments start to back these currencies, I will jump in or rather start using. Citi, JP Morgan, and others are creating currencies that may garner my attention. As far as investing in the currency you need to think about why would you invest in the Dollar or Euro? You use it, but very few of us invest in currencies. We live in interesting and exciting times.
In closing, included is our required annual privacy notice. It essentially says we do not share any of your information unless it is needed for opening and managing your accounts, you direct us to, or a court order. I hope you have a healthy happy and prosperous New Year. Kathy, Bill, Keith and I thank you for your business and trust you place with us.
Willis G. Ashby, CFP®
References: NFIB, Vanguard, NYT, Earnst & Young, Morningstar
Animal spirits is the term John Maynard Keynes used in his 1936 book The General Theory of Employment, Interest and Money to describe the instincts, proclivities and emotions that ostensibly influence and guide human behavior, and which can be measured in terms of, for example, consumer confidence.