The Pendulum Swings

One of the great strengths of the economy of the United States is the fact that it adapts and changes so well to many different forces. The 2016 elections are proof that the American people are not afraid to go in a very different direction regularly.

One of my Babson College professors, Dr. John Hornaday, often described the U.S. Economic and Political system as a large pendulum that swings back and forth between conservative and liberal policies on a regular basis. After eight years of fairly progressive and liberal policies, we have taken a sharp turn and will take a very conservative agenda for the coming four years. Some might view this as risky and problematic; rather, I like to think of it as a regulator on a combustion engine that makes regular adjustments to fine tune the performance of the engine.

I have written often about my concern about the fiscal affairs of our Federal Government. Our Washington leaders seem to think a balanced budget is one that takes in 4% less than we spend every year. Over time, this habit becomes a problem that is even more difficult to fix. Look to Venezuela, Puerto Rico, Greece or Italy as examples of fiscal mismanagement. Puerto Rico is in default on its debt and citizens are leaving for better-managed countries. The fiscal condition of the United States is certainly not close to any of these countries today; however, a decade or so of continued fiscal mismanagement and we may be much closer. The shift back to conservative policies may force us to better manage our fiscal affairs and put us back on track to a stronger balance sheet.

I am optimistic that the Trump administration can create a confident environment for business leaders. Trump may unleash a bull market in optimism among CEOs which could be very instrumental in creating more growth in our economy in 2017-18. Further, investors have just recently become more optimistic toward stocks; but, for the past four years investors have favored bonds and other lower-risk alternatives. So, we still view the Investor Psychology component of the markets as neutral to bullish. As usual, there are risks in the financial markets, like possible trade wars, over leveraged banks in Europe and selective emerging economies, and the prospect of a sharp rise in interest rates. Each of these factors could create a market correction at any time in the coming year. We would anticipate at least one five-percent correction in the first half of 2017 and a ten-percent correction is also possible at some point in 2017, if the right circumstances arise. We suggest preparing for the correction in advance and thinking about how you might take advantage of this opportunity when it occurs.

We know there will be continued volatility in 2017. However, we believe it will be a year of progress.

Written by: Robert Lutts, President & Chief Investment Officer

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