Todd E. Gray, Portfolio Manager
Todd is a senior member of our Trust Investment Committee.
This past year has certainly included a wide variety of unexpected events, including the fear-induced sell-off in January and February amidst plunging oil prices and the decline of Chinese stock prices, the United Kingdom’s Brexit vote in June and, the U.S. presidential election outcome in November. Despite these events, U.S. stocks proved resilient with the Dow producing a total return of 16.50% and the S&P 500 Index generating a return of 11.96%. The gains in U.S. Stocks were wide spread with ten of the eleven economic sectors producing positive returns led by the Energy sector. Healthcare was the only sector experiencing a decline. The best performing stock for the year was Nvidia up 224% and the worst was Endo International which was down 73%. From a style perspective, “Value” stocks significantly outperformed “Growth” stocks.
As for international stocks, emerging markets was the winner producing a return of 11.14% versus 1.0% for developed market stocks. Bond returns were low with the Barclays Aggregate U.S. bond index producing a return of 2.65% and 0.25% for the Barclays Municipal bond index.
The current economic expansion is now 90 months old, twice the “average” duration of expansions since 1900. The bull market is now three months short of its eighth birthday. Only one bull market since World War II has lasted longer. It has been said that bull markets do not die of old age but from the fear of a recession. Each of the 10 Republicans presidents since Teddy Roosevelt have endured a recession in their first term in office with nine of them witnessing the recession within their first two years in office. The U.S. economy does have some momentum as we head into a new year. During the third quarter, Gross Domestic Product in the U.S. grew by 3.5% which was the best quarter of growth in two years. The labor and housing markets continue to show healthy trends. Early estimates for holiday retail sales are projecting an increase of 4.9% over last year. This would be the biggest increase since 2005. Consensus estimates are projecting economic growth here in the U.S. of 2.3% in 2017 and year over year corporate earnings per share growth of 11.8%. While we may be overdue for a recession based on the average duration of previous economic expansions, the fundamentals of the U.S. economy combined with low inflation and interest rates are fertile ground for the expansion to continue for the immediate future.
The single most asked question is what does a Trump presidency mean for the stock market? The stock market’s reaction thus far has been very positive. Exactly what President Trump and a Republican-controlled Congress will be able to achieve together remains uncertain. The President-elect has called for increased infrastructure spending, lower corporate taxes and less regulation all of which are viewed as pro-growth and being good for stocks. The biggest immediate danger that President Trump poses to the U.S. economy is in the area of free trade. The threat of tariffs on foreign goods could spark a trade war which would risk plunging the world into a recession. Our hope is that this rhetoric is just a negotiation tactic to bring key trading partners, particularly the Chinese, back to the bargaining table and that the business leaders he has nominated for his cabinets will keep him from pursuing protectionist tactics that could destabilize the global economy.
Regardless of the policies implemented by the next administration, I will remain focused on investing in high quality companies with significant competitive advantages at reasonable prices. This approach may lack marketing appeal but it does not depend upon on any specific political climate to be successful. In one of his letters to the shareholders of Berkshire Hathaway Warren Buffet wrote, “The whole idea in investing is to buy into good businesses and if the business does well, you do well if you don’t pay too much. This was true 25 years ago and it will be true 25 years from now.” This quote represents the essence of our approach to stock investing being to buy the stocks of companies with great underlying businesses, buy them at reasonable prices and then let time work for us.