An Alternative To Money Market Funds
2016 is now history and what a year it was! The Dow Jones Industrial Average, S&P 500 and Nasdaq all reached record levels. Perhaps the biggest story of 2016 was Donald Trump’s surprising victory in the Presidential election. Trump’s victory triggered an enormous rally in the stock market. The Dow Jones Industrial Average came within a whisker of the 20,000 level last month before drifting lower.
Several international events impacted the global financial markets. The Brexit vote sparked a series of events in Europe leading many to question how much longer the European Union can remain intact. The Panama Papers exposed widespread corruption on a global scale. Terrorism left its mark on both sides of the Atlantic. Who will ever forget the sight of the horror caused by the terrorist attacks in Brussels, Orlando, Nice, Turkey and Berlin?
The yield on the 10 Year US Treasury doubled since hitting its all time low of 1.35% after the Brexit vote in June. The Federal Reserve raised rates by 25 basis points on December 14 and may raise rates a few times in 2017 as well. The spike in US interest rates then led the US Dollar to strengthen significantly against the world’s other major currencies. The Euro traded below $1.04 vs. the US Dollar last month and is likely headed towards parity, if not lower. The Japanese Yen and British Pound weakened as well.
So, any future Fed rate increases could cause a rift between the Trump administration and the Fed. The strong dollar is an area of concern for the Trump administration as it harms US firms’ competitiveness. Remember, Mr. Trump campaigned saying Janet Yellen will not get another term to Chair the Federal Reserve. As a result, her term ends in February of 2018.
Another concern for the Trump administration is the $20 Trillion in US debt outstanding. As we have discussed previously, if the interest rate paid on this debt were to increase by 100 basis points (1%), this would cause the budget deficit to rise by $200 Billion annually. The budget deficit for 2016 was $588 Billion despite record tax revenues.
The S&P gained 9.54% in 2016. Meanwhile, our clients whose accounts were managed by the firm for all of 2016 saw their portfolios grow by 10.30%, once again outperforming the S&P 500. Our focus continues to be on firms in the S&P 500 with a history of paying dividends and raising their dividends. Given the strong US Dollar, we want to focus on firms that generate the bulk of their revenue in North America. Pipeline and Energy firms, Retailers, Utilities and Telecom will continue to be areas where we will seek to invest.
My weekly radio show on WWPR 1490 AM airs at 12.30pm each Friday. The show can also be heard live on the station’s website (www.1490 wwpr.com). My prior radio shows and news columns are available on my firm’s website (www.amescapmgmt.com).
If you are unhappy with the returns now offered by money market funds feel free to contact us.