October 11, 2018 Letter to Clients

Jimmy Dean once said, “I can’t change the direction of the wind, but I can adjust my sails to always reach my destination.”  This quote has always resonated with me as change is constant and many times appears in ways that we cannot control, and I’m reminded of this as I watch my children experience their own significant changes this school year with the start of high school and middle school. I’m sure many of you can relate to this next phase in our lives, and I know Jodie and I will adapt to this next chapter. 

As your financial advisor, I understand the need to be prepared especially in times of unpredictability and continuous change. As we prepare for the last quarter of the year and the next round of news on evolving international relations and potential policy and leadership changes coming out of Washington, part of my role as your financial advisor is to understand how those changes may or may not impact our clients’ portfolios.  

This Bull Still Has Legs

Bull markets, as defined by a period in which stock prices consistently rise, are most common when investor confidence is high, the economy is growing, unemployment is low, and inflation is somewhat tame. The recent rally in the S&P 500 marked the longest bull market on record since World War II. Fundamental drivers of stock market performance remain supportive of this bull’s run, driven in part by consistent corporate earnings, monetary policy and economic growth. Quarter after quarter the question remains, “How long can this bull market last and what will be the cause of its demise?” The end of this bull market would most likely not be born of fundamental causes. Impacts of trade policy, a change to party leadership following mid-term elections or a jump in inflation could pose the biggest risks to this old bull.  

The fiscal stimulus from last December’s tax legislation, estimated around $800 billion in 2018 according to Strategas Research Partners, has kept the economy moving at full-steam ahead and seemingly inoculated for now against the ill effects of trade tariffs, higher interest rates or other negative surprises.  Corporate profits in the U.S. were up more than 20 percent in the first two quarters of the year. Solid, steady job growth continues, and signs of wage growth are building, all contributing factors to a continued run. However, the Fed will likely be on hyper-alert to signs of an overheating economy, which would occur when a prolonged period of good economic growth leads to high levels of inflation. I expect the Fed will hike interest rates one or two more times before the end of the year to keep a lid on rising inflation. The markets can take interest rate hikes in stride as long as they are moderate and gradual, which is likely to occur as the Fed is not looking to end the expansion with unnecessary overtightening. 

Bull in a China Shop: Tariffs and Trade Negotiations

As the topic of trade continues to dominate headlines, and in fact there are new announcements being made as I write this letter, I recognize that the influx of information from news sources can be overwhelming. To better understand the impact of tariffs to the U.S. and global economies it is first important to define tariffs and the role they play in international trade.

What is a tariff? A tariff is a tax imposed that adds to the cost of imported goods. It is often used by governments to generate revenue or to protect domestic industries from competition. And while the concept of tariffs is not a new one by any means, as our founding fathers rebelled against them in Boston Harbor in 1773, the debate of tariffs and their role and impact to the economy has been thrust into the headlines over the past year. 

The expansion of free trade over the last three decades has led to country interdependency in the global supply chain, meaning individual parts for a single end-product manufactured in one country are made all over the world.  Higher import prices resulting from tariffs mean higher prices for many common goods that consumers purchase. When tariffs are imposed on imported goods such as steel and aluminum, for example, it results in an increase in the price of products manufactured using those metals, such as household appliances, medical devices, electronics and construction materials. The overall effect of tariffs is a reduction in imports and an increase in domestic production.  In the short term, domestic industries can benefit from a reduction in competition and the government will see an increase in revenue. While some businesses will profit initially, the higher prices for goods can reduce consumption by individual consumers and by businesses in the long-term.  This in turn can have a negative impact on overall economic growth and international trade because markets like free and fair trade, with minimal trading barriers such as tariffs. But despite ongoing trade war rhetoric and the growing list of goods subject to tariffs, the markets have remained resilient as evidenced by the recent record highs on Wall Street.

Midterms and Markets

With the impending midterm elections just around the corner, we will be closely watching how the battle for power and potential new policy decisions impact the markets and global economy. Historically, changes in Washington have not impacted the long-term performance of the markets; however, it may bring near-term volatility. I encourage clients to resist allowing political angst to influence investment decisions especially as the media noise tries to distract from the bigger picture. It is my position as your financial advisor to focus on meeting your short, intermediate and long-term goals as we navigate the ever-changing landscape and employ tactics to mitigate portfolio risk.  The market’s longer-term reaction is ultimately more impacted by the strength of underlying economic fundamentals, which continue to be strong. 

Don’t Chase Quarters in Front of Bulldozers

I had a conversation recently with a portfolio analyst about investing fads of the early 2000s, specifically Crocs Inc., most known for their colorful resin clogs worn by everyone from preschoolers to medical professionals. Once the biggest footwear fad of the decade, she reminded me that despite its market debut of $21 per share in 2006 and reaching slightly over $75 per share the following year, the share price fell by 30% in a single trading day in 2007 putting an end to investors’ enthusiasm with the overnight sensation. In fact, while I write this letter the stock (CROX) is currently trading around $19 per share, below its initial debut price, eleven years after its sharp decline. Obviously, there are many stocks that have followed this pattern over the years, but this is a strong example that shows you why it is so important not to get caught up in investing fads or following others without appropriate research. At LePage Financial we do not chase the next stock craze and while there is certainly opportunity to reap the rewards of single stock selections, there is also great risk involved. Thus why we perform extensive due diligence for our clients when it comes to investing so that we may protect you from circumstances such as these in the short and long-term.  Simply put, my role as your financial advisor is to calculate risk to returns.

Investors often compare their own portfolio returns to stock market indices like the S&P 500 or the Dow Jones, and while those give a broad view of the state of the overall U.S. economy, they are not indicative of individual portfolios as the values of assets other than stocks are not reflected in these indices.  The S&P 500 is based on the market capitalization of the 500 largest U.S. publicly traded companies and the Dow Jones shows how 30 large, publicly owned companies have traded on the stock market during a trading session.  Our clients’ portfolios are widely-diversified and allocated not just in stocks, but amongst various asset classes with an eye on individual risk tolerance while striving to meet the financial objectives of each investor.  Our goal is to be mindful of the course we’ve set for your financial plan during both times of market growth and during periods of market volatility.

We’re in a period of continued economic expansion and have been enjoying the growth of the market for some time; however, as your financial advisor I constantly look forward in the markets as they are ever-evolving.  With some settlement of trade deals and an expected strong earnings season going into the fourth quarter, I expect the uptrend in the market to continue as uncertainty is lessened. The markets have been able to shake off external concerns to date and should continue to endure bouts of volatility as long as economic data remains robust. Despite the corrections in the market earlier this year as we anticipated in previous letters, we’ve maintained a positive outlook for market performance.  This year has experienced more modest returns in comparison to the higher returns of 2017, but I still expect the markets to deliver solid returns to end the year especially against the backdrop of a growing and stimulated economy.

As your financial advisor, it is important to have a clear vision towards your financial goals going into 2019. Therefore, we invite you to contact our office to discuss any significant life changes you have experienced or that you may encounter.  I recognize that this can be a very busy time for many of you especially as we enter the holiday season, but we encourage you to contact our office at any time with specific questions or concerns as it is extremely important that we work together as a team to ensure that we meet your needs and all desired goals.

LePage Financial would not be where we are today without clients like yourself. Colleen, Darci, Jodie and I want to thank you from the bottom of our hearts for your continued confidence and trust, and we hope that you and your family find time to enjoy all that this time of year brings.

Best Wishes,

Steve LePage