This is a series that I will publish once a quarter. It is a quick overview of three areas: Market, Economic, Financial Planning. The idea is not to go super in-depth into any topic but rather to just get a quick glimpse into the financial and economic world we live in. I look at this information and use it to frame my expectations. My portfolio, or my ideas about what a portfolio should look like, do not change based on these quarterly reports (I should hope that neither do yours). I do however find that having basic expectations about the future can be a very useful behavioral tool for myself. For example, if some of the economic data we look at is strongly negative, I would conclude that we should be in store for some rocky movements in the markets. If and when that happens, I will not panic as much because it was expected. If it doesn’t happen…yay! It sounds silly, but this tactic has helped me over the years and so my hope is that it can potentially help others as well.
What a doozy. The election was a pivotal event for most of us. Regardless of your stance, it was a fairly historic win for Mr. Trump. Despite the initial fear and panic in the markets, it turns out that the US market seemed to be relieved that the whole experience was over. That or everyone expects massive tax cuts and positive economic explosion to ensue…
International markets and fixed income investors have not been as happy, but as with anything, one quarter is a very short time period and these markets more than likely exhibited an over-reaction to Mr. Trumps federal reserve and international trade comments during the election. The chart below outlines those moves during the 4th quarter (1-Year and 3-Year annual returns are included for comparison). The 1-Year numbers indicate that a decently diversified portfolio held up well this year despite all of the episodes that were sure to crash the market… (China, The Fed, Brexit, Trump, Italy)
Lets also take a quick look at the long-term valuations for the globe. The trend of an “expensive” US market continues. Should you sell all of your US stocks? Of course not. Again, this information is used to create some expectations. Over the next decade I expect US markets to exhibit lower returns than its historical average and I expect international markets to exhibit slightly higher returns than their historical average. That is all I take from these numbers.
The granddaddy of them all…GDP! I am kidding. It’s always nice to see where we are in terms of GDP growth, but it is not the be-all end all metric some people like to treat it as. It is nice to see it bouncing around and staying away from a sharp decline. From this measure we can conclude that the economic recover/expansion is still continuing for now.
Unemployment continues its march lower and the moving trend continues in that direction also. Another good sign for the health of the economy. It is hard to argue where it goes from here, but for now, rock on.
Industrial production growth is one of the few indicators that has been mildly negative for a little over a year now. That is not a great sign, but we have heard the rumblings of a recession in the industrial sector for awhile now. Many argue that we are mostly an information/knowledge/service economy now, however this is still an important metric to watch and hopefully it can get back into positive territory this year (It has been trending up over the last 3 quarters).
Retail sales growth continue to remain positive (albeit with a slight downtrend going on) since the start of the recovery. Another positive to note…so keep buying stuff (I’m kidding).
The civilian labor force growth has remained positive since early 2010. It dipped into the negative back in September and bounced back in October. Chalk up another positive indicator.
Housing starts is one of the more noisy and volatile indicators but it is still useful to keep an eye on. The percent change has mostly remained positive during the expansion. Historically, as long as we can stay away from the large yearly declines (usually around 20%) then we typically have no problem with this indicator.
Lastly, here is the 10 year treasury rate minus the two treasury rate. When this becomes negative (at least historically) it has not been a great sign for the economy or market.
As with almost all of the indicators (Industrial Production being the outlier), they have remained positive up til now during the recovery and expansion. This is the good news. The so-so news is that almost all of the indicators have been trending lower over the last couple years. This, to me at least, shows that the economic cycle is starting to turn over. Policy changes from Mr. Trump can change a lot of these variables, but for now, these trends cause my expectations to cool on the market growth outlook for the next couple years. Time will tell.
Financial Planning Overview
Remember, you can still make contributions to retirement plans before your tax filing deadline (April for most). Some of the retirement vehicles have had a very small increase in contribution limits in 2017 (Don’t get me started on this). Take a look at the chart below for this information.
Lastly, if you have not re-balanced in awhile, take a look at your portfolio and make sure that it hasn’t gone too long with out a touch-up. If you have an advisor, double-check that they have done it in the last year or two and that your portfolio closely matches the target weights in your investment policy statement and/or financial plan.
If you have any questions about the topics discussed in this post, how they may affect you or your past experience with them, let me know in the comments, the contact page or on twitter.
Have some fun out there!