The overall markets enjoyed their best quarter of the year going up an average of 4.26%. The small cap section is up 7.28% versus 4.79% for mid cap and 3.82% for large cap. The year-to-date numbers are 8.12% for the broad market, large caps up 7.11% mid-caps 10.39% and small caps leading with 12.43%. It's another example of why being diversified pays off. As I said in the March letter "The markets climb a wall of worry" and it's true again. A lot of people have asked me, "How will the election affect the market?" My answer is: I don't think much. Trump has run a business and understands how important "capital" is to run a business and the effect of too much regulation and taxes. Tax it too much and it changes behavior.
I can personally attest to this. My wife and son were buying older homes, spending a fair amount of capital fixing them up and reselling them. The latest tax increase of Obamacare and the increase in capital gains tax brought that to an immediate halt. It is no longer worth the time, effort and risk for the profit they might make. They are now sitting on properties and renting them. All in all about 16 people are no longer working on our jobs. Trump understands this and will not do anything to hurt business. I believe that Clinton who has been paid $250,000.00 per speech, by multiple Wall Street firms is not likely to do much to change the status quo either. So regardless of who wins in November I think the markets will move up or down based on how the economy is doing, not who wins the election. Again the Federal Reserve passed on raising interest rates. I think it is safe to say they will not raise them right before the election, not wanting to be viewed as anything political. Again they have indicated they plan to raise them this year, but we will see. It would be good to have the low interest rates being paid raised. We are punishing prudent people who have saved. Unemployment is down, inflation is running where they say they want it to be. A rise in short term rates is unlikely to adversely affect many businesses. It may cause a temporary headline dip in the markets.
In Europe the EU is now trying to raise more money as I discussed in my last letter. (Bank loans to politically connected companies and political promises that are not deliverable). They have taken an interesting tack. They are going after Apple for billions in back taxes, both Apple and Ireland say they have paid per the requirements of the law. It will be interesting to see where it goes, if they are successful, McDonalds and a lot of other multination companies will be next.
Willis G. Ashby, CFP®