An Alternative To Money Market Funds
2017 is behind us and what a remarkable year it was!! The three major indices all reached record high levels with the Nasdaq leading the pace rising over 28% in 2017. The Dow Jones Industrial Average rose over 25% while the S&P 500 added over 19% for the year. Wall Street analysts are confident 2018 will be a strong year as well thanks to Congress passing Pres. Trump’s business and individual tax cut legislation last month.
The corporate business tax rate was reduced from 35% to 21%, a 40% reduction. Industries that derive substantially all of their revenues within the US stand to benefit the most under the new law. Among the industries expected to benefit are the transports, retailers, telecom, oil & gas pipelines and health care providers.
Jerome Powell will succeed Janet Yellen as Federal Reserve Chairman in early February, just days after the Fed concludes its first two day meeting of 2018 (Jan 30-31). All Fed meetings in 2018 will two day events, similar to 2017. Mr. Powell is expected to maintain a low interest rate policy while gradually raising rates. Rates need to stay low due to the US debt load of more than $20 trillion. As noted previously, an increase of just 1% (100 basis points) on the interest rate paid in servicing this debt would increase the budget deficit by $200 billion annually.
Interest rates may remain low in the US due to extremely low yields offered by other major issuers of sovereign debt. The 10 Year US Treasury ended 2017 yielding 2.41%, far more than the 0.43% yield on the 10 Year German Bund, the 0.05% yield on the Japanese 10 Year JGB and the 1.19% yield on the 10 Year British Gilts. According to the Financial Times, more than $11 trillion of both sovereign and corporate debt was trading with a negative yield at the end of November.
The low interest rate environment and the enormous sum of money raised by Private Equity firms during 2017 will likely trigger a surge in Merger & Acquisition activity in the US. Bloomberg.com reported that more than $200 billion was raised by Private Equity firms in 2017. The new tax law continues to permit the carried interest provision beneficial to Private Equity firms. Leverage will be limited to 30% of EBITDA through 2021. As a result, Private Equity firms will likely seek equity partners rather than relying so heavily on debt financing, as was done previously.
Both Brent Crude Oil and West Texas Intermediate (WTI) Crude Oil continued their move higher as 2017 came to a close. WTI ended the year @ $60.42 per barrel, its first close above the $60 level in more than two years. Brent Crude Oil ended 2017 @ $66.87 per barrel, a rise of 18% for the year.
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If you are unhappy with the returns now offered by money market funds feel free to contact us.