August 3, 2017
2017 First Half Round Up And A Look Ahead
A lot has happened since our last letter of April 28th. Once again, we’ve seen how powerful political intrigue and influence from D.C. can shape investor perceptions, risk assessment, and valuations. The barely six-month-old Trump administration has struggled at times to gain its footing, but even in the midst of continual political attacks the administration has an enviable record of accomplishment. These accomplishments are, largely, in areas that significantly affect potential asset valuations, most specifically in the over sixty billion dollars of unnecessary business regulations that have already been eliminated by the administration. Our country elected a business man for the first time in many, many decades, as our President. As the administration has filled out, we’re seeing the highest level of business expertise and knowledge, both in the cabinet and the sub-cabinet positions, that has ever been present in the federal government. This bodes extremely well for the future!
Now, to discuss performance. A composite of all accounts, net of investor cost, shows that through the first half of the year, ending June 30th, our firm had a return to our investors of 9.37%* compared to the S&P 500 return of 8.24%*. This 1.14% increase over the S&P 500 Index is a 13.8% enhancement in return, after all costs. It also represents nearly a year’s worth of “normal” equity returns! But the performance picture, or should I say outperformance, actually gets even better when you look at our firm’s investment performance through the end of August 1st. In this time frame, our firm’s net return to clients is 14.03%*, after all expenses, compared to the S&P 500 Index during the same time period of 10.61%*. The extra 3.42% return that we’ve added over and above the index return represents a 32.2% increase over the index. What do these numbers tell us? I think they tell us that we’re in the right sectors, industries, and individual equities. You know that our firm is a concentrated asset manager that strives to anticipate changes and movements in various industries and pre-position your funds to get in front of those movements. To sum it up – our plan is working! You’re likely also aware that we anticipated a well above average performance of your portfolio for 2017, and indeed, for a minimum of 5-6 years ahead. We believe our portfolio, in relation to the market, is still fundamentally undervalued by a large margin. We believe is likely to continue to perform not only at a high level, but to significantly outperform the market as a whole. In fact, it’s our belief that the huge outperformance that we’ve experienced year-to-date, through August 1st, will accelerate through the rest of the year, giving us an even greater advantage.
Despite this great news, I recognize that it’s easy to get concerned about the economy and the ability of this Presidential administration to ensure its business oriented agenda is accomplished. Healthcare has been a great example of that concern because of the difficulty of eliminating the monstrosity of the Affordable Care Act (Obamacare) and putting in place a market based, patient-centric, replacement plan. It seems like it’s taking forever, but I have great confidence that this will be accomplished, although I’m not so confident that it happens ahead of other major policy initiatives like tax reform and infrastructure development.
Our 2017 Second Half Expectations
Here’s what I see happening in the second half of 2017. First, I believe that Congress will ensure the Congressional Budget Office – the arbiture of legislative bill costs to tax payers – will utilize dynamic (not passive) scoring on the various Trump policy initiatives. Dynamic scoring vs. static scoring means looking at the positive effects that are likely to accrue from these rational, common-sense changes in how the government intervenes in our market and taxes our people. Once dynamic scoring is used, I believe it will be very difficult for politicians to stand in the way of the practical and obvious solutions being put forward by the administration. Secondly, it’s our belief that we will see substantive tax reductions for the vast majority of individuals, and that there will be a huge decline in the corporate tax rate with coincident reparation of over two trillion dollars in cash currently held overseas by American corporations, back to the U.S.
These tax reforms will have broad and decade long implications to the growth of our economy. This will pay, long term (in our view), for the cost to the government of tax reductions. It is also our belief that we will see, this year (or at latest by early 2018), a broad infrastructure program that is likely to spend one trillion dollars and that will have a huge near-term effect on economic growth. This infrastructure program should also have a very large long-term effect on the productivity of our nation. Let’s face it, our roads and bridges are not in good shape. Our waterways also need help for the transportation of commodities like coal.
Nothing that the Trump administration has proposed is new or different. The policy prescriptions of the Trump administration are very similar to those that were followed by President Kennedy and later by President Reagan. Those policies led to decades long above average growth in our economy and investments.
It was only a short time ago that we were being told by politicians to get used to the “new normal” of nearly low or no growth in the economy, a rise in the disparity between high income earners and low income earners (whose wages have not risen for 15 years minimum) and the need to continue to allow folks to come into our country illegally, thereby depriving lower educated or trade-skilled Americans of jobs that could actually support them and their families.
Two weeks ago I was asked to speak in an investment conference in Nashville, TN. One of the speakers ahead of me, a very distinguished PhD with over 20 years of high level service as an economist in the federal government, and 25 years of private sector experience as a high-level corporate economist, summed up his views on the necessity for “immigration reform” with this unbelievable statement: “And if we don’t let them in, who’s going to clean our pools?” He was serious! This remark shouldn’t be stunning to me or to you, but I honestly was stunned. The elitism, the abuse of American labor and the cheapening of the value for the illegal laborers that do these jobs, should make all of us sick to our stomachs. We shouldn’t take advantage of people coming into our country. Nor should we overburden our social welfare systems and, in many cases, import criminal activity. We also should not deprive our kids and adults of meaningful job opportunities that provide a livable wage. In my opinion, this is absolutely the U.S. Chamber of Commerce’s mission. They want cheap labor and ever-increasing profit margins, with which I normally have no quarrel, unless it unfairly exploits those coming to our country and, more importantly, deprives American of what is rightfully theirs in terms of opportunity. It also aligns the U.S. Chamber with far-left politicians interested in bringing in government dependent immigrants who will vote for a politically biased socialist agenda.
Driving Your Portfolio
What will help increase your investment portfolio are the policies being pushed by the Trump administration that have been proven historically to accelerate our growth rates to 3% and above from the anemic 1.4% or 1.5% range maximum of the Obama economy. We don’t have to accept the “new normal” that we were told we better get used to under the previous administration. That was a lie. What we can do is manage our economy and continue to reduce regulations that are expensive, unnecessary, and that handcuff business by overburdening them. We can recognize that what drives economies, and your investment values, are entrepreneurial opportunities – not government guarantees or enhanced government regulation and oppression at the expense of those opportunities.
The world is changing, folks, and our job for you is to stay in front of these changes. These changes are resulting in world class investment performance in your accounts at a minimum cost. I, for one, am thrilled to have been given the opportunity by you to help your family’s financial security grow and thereby increase your ability to help others. We live in an exciting time that, ten years from now, will likely yield results that are hugely underestimated by the markets right now.
I want to state this unequivocally: In a thirty-year career, it is my opinion that the seeds of growth that are being planted now yield the most expansive economy and equity investment movements that we’ve seen in the history of our country. For those of us who lived and worked in the 80’s and 90’s, we thought that was a great time for investors. It’s my belief that we’ll exceed the investment returns of that period.
Thank you for the opportunity you give us every day to help grow your family’s assets and to help folks in our community. It means a lot to us and we are very appreciative. The “Spectrum Way” is not the market way and it’s not the investment business way. It works because it’s different. Please consider helping those you love and care for by sending them our way. We’re enclosing a referral sheet with a return envelope for that purpose. God Bless you and yours and I hope the rest of your summer is wonderful!
Kelly Buckley, MBA, CFP®
Managing Director for Asset Management