Atlas 2017 Market Report
January 1st, 2017
The year 2016 had many surprises from surviving one of the worst starts to the market in history to a major upset in the US Presidential election. Many other events either surprised everyone or if it was expected, didn’t necessarily have the result people expected on the markets. Last year had interesting affects on portfolio’s. The market was down to flat, your portfolio was up. The market was up, but your portfolio was flat to slightly down. Unless your portfolio makeup was mainly market indexed ETFs or Mutual Funds, you experienced this type of affect on your portfolio. You may have been frustrated or elated depending when you viewed your portfolio. If you read or watched any financial news, you know their goal is to get you to read or watch their articles or programming so their headlines draw you in. Headlines like “stocks making record highs” will draw people in, especially as the Dow Jones Average neared 20,000 in the last month of the year. But truly, the Dow Jones Average is made up of 30 stocks and only 6-7 stocks has the majority of the move in the last two(2) months of the 2016. Those 6-7 stocks Do Not represent the entire market or portfolio. We’ve preached for years about diversification and over time it has proved to outperform and help smooth out the rough volatility moves in the market. To prove this point, you need to focus on diversification, the NASDAQ 100 which is a makeup of the 100 largest stocks in the NASDAQ market had big moves this year, but the Top 4 stocks made up 40% of its move, but the headlines were the NASDAQ 100 made new highs in 2016. What if you owned other stocks in the NASDAQ 100, you may have been flat on the year, but the headlines drew you in. Many tech stocks did very well leading up to the election, then faded and went flat the last two months. Banging the drum again, diversification is the key to long-term success managing your portfolio.
In 2017 we have several things to keep our eye on. The Trump administration is taking over on January 20th. Whether you like it or not the pro-economic growth policies WILL help the economic, especially the short-term. With the sweep of all three houses they have a better chance at passing these policies on personal and corporate tax reform than any time in history. The last administration came in with the focus on how to save the economy from the brink, this administration’s focus is how to grow it and make everyone prosper. To be determined.
There is always different affects on the market and on individual sectors in the market. There is business, regulatory, political, geo-political and competitive risk. The companies with the best management and widest moat around their business to protect their products, services and processes will succeed the most. The moat is important because the wider the moat, the less chance of competitive risk. The thinner the moat, the barriers to enter into those markets and take market share are greater. Let’s say you had an idea and you wanted to setup an ecommerce business, are you truly going to be able to compete with Amazon? How about an idea for a better electric car. Can you generate enough capital to compete with Tesla or the major car manufacturers? Even the major car manufacturers can’t compete with Tesla. Walmart, the largest retail company in the world has been able to get better traction with their on-line sales, but still only a fraction of what Amazon is generating. So you say you have a great idea for a better and easy-to-use smart phone, I’m sure it will be no problem to compete with Apple or Samsung. Not sure about that, ask Microsoft, they have an abundant amount of resources between money and resources and they can barely crack into any meaningful market share. We bring this up because those businesses, for now are safe from major competition, but as we all know things change. Why would you want to invest heavily into commoditized industries and businesses? Its not that they can’t do well and many times those businesses will do well in Bull markets, but depending on their management and business moat, they are at-risk in the long-term.
A second place to look for investing or re-positioning in 2017 is in the laggards of high-quality companies with solid balance sheets. For decades there has been a portfolio strategy called, “Dogs of the Dow” theory. Essentially this theory is investing in the bottom five underperforming Dow Jones Average stocks that have the highest yield for the calendar year. Over the decades it has proven to outperform market performance. We cannot make recommendations in this newsletter, but there are several ETFs and Mutual Funds that follow this theory including one that applies this theory to all the S&P business sectors. This way you can smooth out the peaks and valley’s of the market volatility and potentially reap the benefits of the catch-up trade with the previous year’s underperformers. Of course you could do this manually by buying the individual stocks, but remember this should only be done based upon a percentage of your overall portfolio and your risk profile.
Third, you should contribute to your company 401(k) as much as you can. Hopefully your company has a match and your contribution will help grow it much quicker, but long-term, this is the best way to build wealth because its much easier to save when the funds are taking out of your paycheck and immediately invested for you versus relying on your to invest it after its in your checking account. Every year you should be increasing your contribution, even a little. Obviously you don’t want to be cash strapped, but if you receive a raise, use a part of that towards increasing your 401(k) contribution. Over time, you will be quite surprised how fast it adds up. If your company 401(k) isn’t being managed by Atlas, we understandably don’t know the quality of your asset choices, but just like investing your money in an individual account, you want your company 401(k) money to be invested in 2-3 different ETFs or Mutual Funds. Also, check your account once per month or at the minimum or once per quarter. Looking at it every week will drive you a bit nuts, especially if you an emotional person. Your company 401(k) account is for the long-term and you should re-allocate your funds and contribution percentage into each fund every 3-5 years depending on market conditions and where your life stage is getting closer to retirement. Too many changes (or over trading) usually leads to under performance over time. If you don’t know what you should be invested in, work with an investment professional to assess your situation and risk tolerance.
What to expect in 2017:
Three scenario’s –
#1 – (Market up 10% – 15%+) Trump administration comes in and is able to get MAJOR tax reform for personal and corporate tax brackets in the first six months. They are talking about reducing the corporate tax rate from being one of the top three in the world around 35% to 20% (they wanted 15%, but we believe they will be closer to 20%). Think about it, if a company has razor thin single-digit margins and now they are getting a 15% increase in profits without a cost reduction in goods and services, they can use that money to expand, hire more people, R&D (Research & Development) or M&A (Mergers & Acquisition). All of these are positive affects on the business and overall economy. Not sure if it will help the deficit, the new administration believes with more employment (and higher paying jobs) and greater investment, there will be money coming in via taxes to pay it down (i.e. trickle down effect).
#2 – (Market flat +/- on the year) Trump administration comes in and gets part of the tax reform done, but not a major effect on corporate tax reform. Much of the market move after the election was on “hope” that tax reform, specifically corporate tax reform would be in effect and helping the economy expand in 2017. If it is not a major change or if corporate tax reform is only reduced a little, the market will contract, probably in a significant way and the chances of the economy falling into a recession in late 2017 will be greater than 50/50.
#3 – (Market down 10% – 15%+) Trump administration gets stonewalled by politicians wanting their own line items in the tax reform policy and it gets all “porked up” to a point where tax reform is completely watered down or worse, nothing is done in 2017 at all. If this scenario happens the chances of our economy going into a recession to 75% or greater in 2017 and an almost certainty in 2018. Oil will then fall and stay below $40 and possibly $30 which will bring down the energy sector and drastically affect financials for multiple reasons; first they hold a lot of debt on the energy companies that can’t make a profit on oil production when the price is below $50. Second, if the economy isn’t growing the Fed won’t raise interest rates and the banks will be back in a situation where they are not making any real money on loans and this is where all the egregious business incentives were put in place for many of the banks because they haven’t been able to make the profits they once were. If you have been following the financial news or reviewed your bank statements for line items charges you have never seen before, you know exactly what we are talking about.
Certainly there will always be unknowns such as geo-political and foreign policy events. Trumps tweets do not provide any comfort when he posts them on how he expects to handle that type of activity, but we will see if that is positively controlled once he takes office. We have already seen and you can bet on it with near certainty that his tweets and other social media postings WILL move markets, both positively and definitely negatively as he seeks acceptance of everything he does.
We would love to tell you everything is going to be ok and wonderful and the markets will be on a nice even ride to a positive return year along with world peace. We wish we had the power to make that happen and hope the new administration make all the right decisions (or least most of them that do not have a major negative affect on our lives), but we will see. Avid readers of this newsletter know when it comes to managing portfolio’s we have fairly common advice because everyone’s situation is different and there is no “one” recommendation or suggestion that fits all. As we mentioned, diversification is critical and so is patience and reducing emotion as much as possible, which is difficult with financial matters. Develop a plan, stay focused, make changes only when necessary and when possible, make consistent contributions to your winning positions. Just like in life, winners breed winners and winners like winners, those winning positions will have momentum and in a Bull market, will run stronger and further than many stocks that are flat to negative.
Again, Happy New Year! We want to wish you and your family only the best for health, wealth and happiness from this point forward.
Ronald E. Lang, Principal &
Allen B. Lang, Senior Portfolio Manager
Atlas Wealth Management, LLC
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PS> If you own a business and you DON’T have a 401(k) plan, you could be hurting yourself by increasing, not decreasing your tax burden, in addition to exponentially saving for retirement. You may want to connect with us to discuss these benefits.
PSS> If you own a business and you DO have a 401(k), when was the last time you had it reviewed for fee structure and asset performance? Connect with us and let’s perform a review and make suggestions to a better plan across the board.
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