Gill Capital Partners May 2017 Market Commentary
What are we talking about at Gill Capital Partners?
Our Investment Committee meets weekly to review portfolio allocations, macro-economic events and our investment managers. Below are topics that are top of mind within the committee.
U.S. Political Update:
Regardless of one’s political views, the recent steady stream of negative headlines coming out of the White House is troublesome to many Americans. Just two weeks ago, the new administration appeared poised to begin pushing forward their agenda, specifically healthcare and tax reform. However, a series of missteps has plunged the White House into a near-constant state of damage control and seems to have them chasing their proverbial tails. As the headlines have become more frequent and unfavorable in recent weeks, the markets have been relatively calm. What does the market’s reaction to recent events tell us? And what might we expect if these types of headlines and issues continue to circulate or even get worse?
We believe that the hope for deregulation and tax reform have been the most important forces driving equity markets higher since the election. We continue to believe that this hope will need to become reality, particularly with respect to tax reform, for the market rally to continue. The Trump administration appeared to be gathering momentum and support following the narrow passage of the healthcare repeal and replace bill through the House of Representatives. Since then, however, the Trump administration has been mired in a series of self-inflicted controversies that is leading to a real credibility problem. So, what has been the market’s reaction to the constant stream of negative news stories pouring out of the White House? Until today’s market pullback, stock and bond markets had been relatively flat over the past couple of months, and are still substantially positive for the year. From our perspective, this suggests that the market did not believe that the political headlines put the implementation of deregulation and tax reform in jeopardy. These policies are largely supported by the Republican Party and have been for years, and they are unlikely to be abandoned due to Trump’s headline-making behavior. That being said, today’s market pullback suggests a heightened level of concern related to the chaos ensuing in Washington. The biggest risk we see now for the equity market rally is that our political leadership gets caught up in a lengthy investigation process that delays policy reform to the end of 2018 and into the mid-term elections, where the republicans could lose their majorities and therefore the ability to pass legislation.
We will be watching to see whether our political leaders and institutions across the board begin to question Trump’s viability as president. More specifically, we will be watching very closely to see whether Republicans begin turning against Trump. To date, most Republicans have continued to show support for him while Democrats have been leading the charge of dissention. Our Investment Committee is passionately debating these matters and how they should inform our asset allocation. We will continue to keep you informed as our thinking and key events progress.
Corporate Earnings Update:
Taking a break from the political headlines to look at some fundamentals, Q1 earnings season is wrapping up, and the picture is largely positive. With over 90% of the S&P 500 having reported earnings, sales in aggregate are higher by 8.7% and earnings are higher by 15.5% on a year over year basis. Of the companies that have reported so far, 71% have beat their Q1 earnings estimates. The one clear soft spot has continued to be brick-and-mortar retailers. As shown in the chart below, these retailers continue to suffer while internet marketing and retail businesses thrive.
Corporate earnings in general look great and are trending higher. This is a tangible fundamental input that will continue to support stock valuations. The trend within retail is continuing as more consumers are buying goods online as opposed to physical stores. Businesses that have failed to adapt, like Sears and many of the large department stores, will continue to struggle until they can adapt to the evolving spending behaviors of consumers.
As always, please let us know if you have any question or concerns, or if we can provide assistance with any other financial planning matters including education, taxes, insurance or estate needs.