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What We Know, What We Think We Know and What We Don’t Know....Part Deux

What We Know, What We Think We Know and What We Don’t Know....Part Deux

| July 23, 2018

Q2 2018 Quarterly Update

We had surprisingly positive reviews the first time we tried this format, so we are bringing it back!  We know some of our readers prefer the more traditional analysis of the current economic / market environment, so let’s start there.  US stocks are slightly higher for the most part, with the gains almost entirely due to the large cap growth space.  In fact, according to CNBC (through July 9th), just three stocks are responsible for 71 percent of all gains in the S&P 500.  If you are heavily invested in this space, congratulations!  Of course, you are likely operating in reverse – at least if you are a believer in “buying low and selling high”….

Meanwhile - in the world of bonds - short term interest rates have ticked higher with the Fed following through on their promises to hike.  Longer term yields have remained stubbornly low however, and the 10-year remains below our key level of 3%.  Unfortunately, the environment remains a frustrating and confusing one.  On one hand, we should protect against the threat of interest rates rising from historically low levels as the economy continues to strengthen.  At the same time, this threat of rising rates never seems to materialize – at least on the longer end.  If you feel that we are overstating just how confusing the environment remains, maybe we should ask Bill Gross.  Arguably the most well-known bond investor in the world – has been doing so for some 40 years - and now runs the “Janus Unconstrained Bond Fund”.  We’ve been told we can’t quote performance numbers in these writings, so let’s just say that 2018 has not exactly been one of his career highlights to date.

So we could spend another 7 pages talking about stock valuations using Shiller / Buffett metrics, but it would be awfully redundant.  Or we could talk about “trade wars” and what these threatened tariffs will mean for the short and long-term to the global economy.  But we would rather not waste your time analyzing something that no one on the planet can predict whether or not will actually develop into something “real”.  Our guess is that it won’t, but it is a topic that we monitor closely and may very well lead to some lengthy discussions if things progress much further……

So instead, we will keep this brief – we hope entertaining – and let you get back to enjoying your summer!

What We Know

The first one comes directly from our initial “what we think we know” section, and can now officially be bumped up a notch:

“Any tax reform passed in the House and Senate will likely favor large corporations, while the ‘middle class’ should continue to bear the bulk of the burden.  It will of course be disguised otherwise.”

While on the topic, we can now confirm that most of the trillions of dollars handed to corporate America (now and down the road) will be used primarily to buy back their own stock - rather than creating jobs, raising wages, or any of the other goodies the politicians promised. We hate (really) to say we “we told you so”, but…..
One final related note – the swamp ain’t getting drained anytime soon.

On a much more positive note, our own Dave Swanson is getting married!  (way over his head I might add)
From our last rant – worth repeating:

“Until the yield on 10-year Treasury Notes breaks through 3%, the long-term, downward trend is firmly in place.  If unconvinced, look at a 30 year chart of said yields.”

Gas prices just got crazy expensive again.
While everyone remains focused so intently on the next mid-term / presidential elections, recent changes to the Supreme Court – speaking strictly from a financial / economic standpoint – has rendered the socialist movement effectively dead for the foreseeable future.
Replacing windows in your house is crazy, crazy expensive.
The Donald will not be deleting his Twitter account……ever.
Another excerpt from the original that bears repeating:

“The current investment environment is an especially difficult one for retirees (and those on the verge).  Historically low interest rates have left many with a choice of accepting lower returns for the sake of needed safety – or taking uncomfortable levels of risk to chase higher (and often times needed) returns.  Given an aging population and less than optimal savings rates, this is a bigger dilemma than many seem to acknowledge.”  This has gotten worse rather than better unfortunately.

The Red Sox are really good at baseball.  

What We Think We Know

The trend of state and local taxes in IL will remain higher, given the pension problems.  This problem – both here and in other states – is far too understated.
l'll take a step further than last time.  Joe Maddon – after failing to get out of the 1st round of the playoffs this year – will lose his job sometime in 2019.  Should have hired you know who…. (Dave still disagrees – but not as vehemently) 
After watching the Zuckerberg testimony – then meeting with a digital marketing company shortly thereafter – we think we know that how companies collect and use our data should be (or is) completely illegal.  It’s truly frightening just how little privacy we have.
Speaking of which, we think we know why it is not currently deemed illegal.  (see, “the swamp”)
Contrary to popular belief, education expenses may actually decrease significantly in the not-too-distant future.  We believe this for three main reasons:

(1) The lack of job opportunities for graduates commensurate with what they are paying for their education is way out of whack.

(2) We believe that job creators will begin viewing “co-op” or “internship” based education as much more valuable than the traditional systems now in place. 

(3) Now add that expenses related to taxes, healthcare, housing – and education - have become far too burdensome for “the 99%”.  Retirement savings are already being grossly ignored.  Something has to give – and we think it will be college education as we now know it.

Speaking of that last point, we are pretty sure we know that responsible tax reform – with money going directly to the people rather than through Wall Street – would have been a great step in the right direction.Politicians on either side of the aisle will never, ever tackle the two most significant issues our country faces – debt and entitlements – until it is too late (and probably not even then).  They will continue to tell us otherwise – and the party not in power will always be the most vocal about it, knowing they can’t be forced to actually act on their words.  Very few things more entertaining than listening to Schumer / Pelosi all of a sudden care so deeply about being fiscally responsible….while Republicans remarkably now have more pressing matters on their minds.

What We Don’t Know

Now that tax reform has been passed into law, the most important question to us in the short-term involves these talks of “trade wars”.  While we think we know that Trump is right in his sentiments (the US is treated “unfairly” in many cases), we don’t have any idea just how far he will push, and what it will actually mean in the end.  It almost certainly has a lot to do with international under-performance so far this year, and seems to be causing havoc with commodities.
How long will Dave stay married?  (I’m kidding of course….)
How much resolve will this new Fed have in sticking to their plan of raising rates / reducing their balance sheet, should the economy or markets show signs of cracking?  Our guess is not much, but we should at least give them a chance….
Staying with the Fed and as we have stated before, we think we know that talks about a flattening yield curve and what it says about the health of the economy are now pointless.  This manipulation of interest rates both here and abroad by the central banks has rendered such analysis useless.  What we do not know is how, when and to what extent the effects of said manipulation will ultimately present themselves.  It is also a reason we believe that manipulation of markets should be the option of last-resort (preferably not an option at all).  Instead, it has seemingly become the quickest and easiest option – at least until it isn’t….
Why can’t professional baseball players learn to bunt against shifts?
The true, long-term risks associated with artificial intelligence, robotics and technology as a whole.  The benefits are countless, and we see them more and more every day.  But what does this mean for the future of jobs and income?  Will “traditional inflation” be ultimately replaced by “traditional deflation”?  Will an army of robots eventually take over the world?
Circling back one final time to interest rates – why are longer-term interest rates not rising?  Is it continued, behind-the-scenes manipulation designed to offset the mountains of global debt?  Are rates actually signaling a pending recession or worse?  Is it that “this time truly is different”, and minimal interest rates are here forever?

With respect to that last question, we think we know – that we know – that it never is.

 To all of our clients, we can never thank you enough for the continued trust and confidence you have placed in Round Hill Wealth Management.

The opinions expressed in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  

Statements of forecast are for informational purposes and are not guaranteed to occur.  Trends discussed are not guaranteed to continue in the future.  

All performance referenced is historical and is no guarantee of future results.  Investments mentioned may not be suitable for all investors.  

Equity investing involves risk, including loss of principal.  No strategy – including tactical allocation strategies - assures success or protects against loss.  

Securities offered through LPL Financial. Member FINRA/SIPC. Investment advice offered through HighPoint Advisor Group, LLC, a registered investment advisor.  HighPoint Advisor Group, LLC and Round Hill Wealth Management are separate entities from LPL Financial.