January Update

This month should be titled “tailwinds” as a multitude of our holdings have strong tailwinds behind them, setting up expectations for another good year ahead.

While it appears certain the new tax code will be approved, the measure has yet to be officially signed. If the tax code does pass as stands, it will amount to roughly a $1 trillion tax cut for businesses over the next decade. While most independent economists and Wall Street banks predict just a modest boost to GDP growth, Republicans are convinced the new tax cuts will result in a large economic boost along with higher wage growth for all earners. I’ve got my own opinions about the long-term effects of the tax cut strategy and QE experiment, but it’ll be a few years until everything can be fully judged.

With the promise of a new tax bill along with corporate profit margins and stock prices near record highs, investors are positioned very bullish. The latest survey by the National Association of Active Investment Managers (NAAIM) shows that investors are extremely leveraged with an exposure of 109% to equities.

This bullishness, along with the unemployment rate falling to a 17-year low, provides the FMOA with an opportunity to further increase interest rates in their quest for a more normalized rate of around 3%. After the latest interest rate hike to 1.5%, monetary officials are now more likely to stick to their projection of three rate hikes in 2018 and two or more in 2019. Based on future markets, traders are only projecting a 20% chance of that happening. Something must give. It’s probably a coin flip as to who is right. I sit closer to the bond traders.

I’m hoping some of the weakness in stocks trailing the market has to do with some end of year tax selling due to the proposed FIFO rule (first-in-first-out tax treatment on the sale of securities). I will take advantage of both aspects (selling partial positions to offset losses, buying dips of lagging stocks) in my personal holdings