Gill Capital Partners November 2018 Market Commentary
What are we talking about at Gill Capital Partners?
With midterm elections behind us, the Fed meeting concluding as a non-event, earnings season winding down, and the dust settling from a volatile October, it is a great time to take a step back and see where the economy stands. Our Investment Committee meets weekly to review portfolio allocations, macro-economic events and our investment managers. Below are some areas that are top of mind within the committee.
Midterm Election Update – The 2018 U.S. midterm elections on November 6th saw Democrats regain control of the House of Representatives, while Republicans maintained and increased their majority in the Senate. The newly split Congress likely kills any chance of another round of tax cuts, and sets the stage for tough political battles over infrastructure spending, healthcare, immigration and trade. With control of the U.S. Congress now split, what can investors expect?
Our View – The results were largely in line with expectations; however, we now have clarity, and the market likes clarity. In previous midterm election years, the S&P 500 has experienced a sell off prior to the election and, on average, ends the first three quarters of the year approximately flat. However, in midterm election years, 4th quarter S&P 500 index returns have averaged 7.5%. Since 1982, the S&P 500 has returned an average of 14% in the twelve months following a midterm election.
As shown below, there are reasons to be optimistic as the US economy remains strong from a fundamental perspective:
• US third quarter GDP exceeded 3%
• Unemployment remains low, and wages are picking up
• S&P profits grew over 20% in Q3 on a year over year basis
• U.S. equity valuations are more attractive than they were a few weeks ago, with many stocks trading at valuations we have not seen since 2016, and in many cases, since 2011 or earlier
That being said, we are seeing increased risks that are driving a notably more conservative tone within our Investment Committee:
• Rising interest rates and monetary fiscal policy withdrawal – While rates are still far from restrictive, the Federal Reserve is expected to continue increasing rates. At some point, this will impact economic growth. We are already seeing mortgage rates at the highest levels since 2011, with 30-year fixed mortgage rates near 5%. Furthermore, the Federal Reserve continues with its planned balance sheet reduction, and it is unclear how this will impact the markets.
• Federal budget deficits – The Tax Cuts and Jobs Act of 2017 took place at a time when debt levels were already high, which is quite different than previous tax cuts. The result has led to an extremely high budget deficit, with forecasts showing further deficit expansion over the next decade.
• Trade wars and tariffs – The current trade wars (with China in particular) remain a risk, and there are clear signs of slower international growth as a result. Gridlock in Washington could prove to pressure the Trump administration to pivot away from the current posture, the result of which could be meaningful upside for international equities. Until such time, however, this remains firmly in the negative column.
In conclusion, we believe the market is likely set up for a year-end rally based on fundamental economic strength, supportive seasonal trends, and attractive valuations. We also have an eye to the future and are beginning to have discussions about reducing our client’s overall risk allocation. This is being balanced with the shorter-term picture, which continues to provide a constructive investment backdrop for investors, particularly after the correction in October. We will, of course, keep you updated as to our thinking.
New IRS Retirement Plan Limits
The Internal Revenue Service announced this week the cost-of-living adjustments affecting dollar limitations for retirement plans for the tax year 2019. Here are a few highlights from the new provisions:
Income ranges that determine eligibility for deductible contributions to IRAs and Roth IRA have also increased. Please reach out to us if you have questions about how this might impact you, and to discuss pertinent changes (ie. catch-up provisions and income eligibility requirements, etc.)
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.