Rulers, statesmen, nations, are wont to be emphatically commended to the teaching which experience offers in history. But what experience and history teach is this - that people and governments never have learned anything from history, or acted on principles deduced from it. Each period is involved in such peculiar circumstances, exhibits a condition of things so strictly idiosyncratic, that its conduct must be regulated by considerations connected with itself, and itself alone.
With about a month left in what has turned out to be a very eventful 2016, the world seems to be undergoing a profound change. In the United States, the electorate has elected a brash billionaire to restore growth to a sputtering economy and, at the very least, reestablish our presence in the rest of the world. In sum, "Make America Great Again".
Financial markets have responded by imagining a profound move towards deregulation and potentially significant fiscal stimulus in the form of every possible tax cut imaginable, as well as a bipartisan infrastructure spending package. Bond investors looking at this have said, ‘woah Nellie’, it is time to sell, which they have done in a big way.
With the yield of the 10 year Treasury now exceeding 2.35% and rising nearly every day, equity investors have been the beneficiaries of the credit exodus, especially in the bank and small cap area. Those two sectors have dramatically outperformed the advancing broader indexes, and with the traditional race to improve results as the year draws to a close, it is hard to see the move out of bonds letting up. The markets have experienced a big move, so what could change the equation?
Looking across the Atlantic, the biggest issue seems to be a looming referendum in Italy which has the potential to trigger European sovereign nations to question the benefits of the Euro currency. Italy is first in the line of domino nations which could want out in 2017, including France. Other big nations like Germany, face elections which could change the leadership and attitudes all across the old continent. Keep your eye on Italy as it seems with Brexit, and now Mr. Trump in the U.S, the move towards nationalistic type sentiment is gaining steam in a big way.
Polls indicate that the Italians will move to reject the referendum, leading to political uncertainty. In India, a government effort to improve currency collection resulted in the unique move to eliminate the 500 and 1000 note rupee. The rupee now trades at a five year low as the black market for currency affects the Indian economy in a big way. Many analysts see it as a lasting drain on India through next year.
In the oil space, OPEC meets this week, with the Saudis first turning down a preliminary meeting with non-OPEC countries in order to get the OPEC group in order. The same two countries remain the sticking point, Iran and Iraq, who both want to continue pumping at higher production levels. At some point, the lack of capital spending by these countries, as well as here in the U.S, is going to lead to lower production levels. It is not a matter of if but when.
Elsewhere, Fidel Castro died and many Floridians could not be happier, envisioning a democratic Cuba in a short while. Meanwhile, one only needs to look at the economic conditions there and in Venezuela to see why those who believe in Socialism, can you say Bernie Sanders, need to have their heads examined.
As the year draws to an end, I thought it would be useful to mention things to consider over the last month which can help you prepare for the new year. First, in terms of your portfolio, I would think about what you own, why you own it, and do the reasons for owning the asset still hold true. Usually, plenty of opportunity to grow is a primary consideration, as well as the fundamental profitability and financial condition of the business.
In terms of tax efficiency, selling losers now to offset gains should be near the top of any list. If you still want to own the asset, you can buy it back in 31 days. Making contributions to tax advantaged accounts like IRA’s and 401K’s also is important, as is contributing to charities and gifts.All are helpful in using the various areas of the tax code which are available for tax efficiency.
On the legal front, making sure all accounts have beneficiaries and wills and trusts are updated are crucial. Rechecking you are comfortable with your existing attorneys is always advisable. On the health care front, the same is true for your existing physicians. From a small business perspective, now is the time to purchase any new computers or assets which can be depreciated and used as a deduction. I hope everyone enjoyed their turkey, cranberries, and pumpkin pie.
Disclaimer: Y H & C Investments, Yale Bock, and the family of Yale Bock own positions in securities mentioned in the blog post. Investing in stocks can lead to the complete loss of your capital. As always, on any company mentioned here, past performance is not a guarantee of future returns. Investing involves risk of losses on invested capital. One should research any investment and make sure it is suitable with your objectives, risk tolerance, risk profile liquidity considerations, tax situation, and anything else pertinent to your financial situation. Also, the CFA credential in no way implies investment returns will be superior for any charter holder.