Investment Strategies, Post Election

I grew up in rural Wisconsin, on a dairy farm, working 65 hours per week in the summer and 40 during the school year milking cows, planting & harvesting crops, etc. (I was the second oldest of nine children, and my older sister had special needs – my family needed the labor). When I went to college, I “only” had to attend class and study 6 to 8 hours per day. I thought I had died and gone to heaven! Moving to present day – as compared to those early years on the farm – “working in the city” has felt pretty good, too.

I’ve been fortunate to benefit from the move toward the knowledge economy and from the opening of roles to women in business. It’s been quite rewarding to be a woman in finance, and especially to enter this marvelous helping profession of wealth management. 

When I go back to my home town, I see many changes. My high school classmates who stayed in the area generally do not farm, though they may still live in the country. If they didn’t go on  to college, they are lucky to have a job for $20 per hour, with many earning less. Today’s dairy farms are large, where 1,000 or more cows are milked per day. Many Latinos have moved into and around my home town to milk those cows and to work in the plants that produce the meat. My sister and her family live near where I grew up, and her children play with many Latino friends who live in the neighborhood and go to the local school.

Those of us who followed the presidential election news now know that the changing rural landscape, and the seeming economic discontent, was a considerable factor in the election result. Will the President Elect and the new administration be able to “turn the clock back” and bring back higher-paying jobs to my home town?

First, higher-paying jobs. Andrew Adams, Raymond James Investment Strategist, offers this in his November 16, 2016, investment update entitled, You Can’t Stop Progress: “… According to renowned futurist, Peter Diamandis, ‘There are more than 500,000 open jobs in computing right now, representing the No. 1 source of new wages in the United States, and these jobs are projected to grow at twice the rate of all other jobs …’” Will these computing jobs locate in my home town? For the most part, I think not.

Some commentators compare our transition to a knowledge economy to the huge societal changes occurring around the year 1900, when we moved from an agricultural economy to an industrialized one. Andrew Adams quotes Vivek Wadhwa of, “’In every field, machines and robots are beginning to do the work of humans. We saw this first happen in the Industrial Revolution, when manual production moved into factories and many millions lost their livelihoods. New jobs were created, but it was a terrifying time, and there was a significant societal dislocation’…” Politicians at the turn of the century railed against these changes. However, the trend was too strong. I suspect that it is now, too. Political rhetoric aside, I think it is likely that the employment opportunities in my home town will not change much.

Second, a changing societal landscape. As are many of us, I’m the descendent of immigrants.  My grandmother arrived from Germany at age four. At family gatherings, she spoke German with her sisters to avoid small ears hearing the family gossip. For many years, we as a society have allowed undocumented immigrants to settle around and about our nation. Now, in rural Wisconsin, some of these undocumented immigrants do what I did growing up – they milk the cows. Interestingly, many of my former classmates do not.

I understand that – if I never have to milk another cow again, I think I’ll be able to live with that! A question becomes though, if the labor forces currently milking the cows all went home, who would do that work? Could replacement workers be found and what wage rate would be necessary or even feasible? How would that change our milk prices, and the prices of other essentials? Add to this equation the current low unemployment rate of approximately 5%. Retailers in many locations are begging for employees. Economically, is this the time to send an engaged work force away? Discussion of immigration leads to many questions, including those of fairness, law and order, and humanity. I suspect that if there were a mass movement to deport undocumented immigrants, businesses and perhaps even consumers (and, likely, faith-based and other groups), might seek moderation for a variety of reasons.

What about the many other campaign proposals offered by the President Elect? We could go through them one by one, but let me attempt to address the larger economic picture:

In general, the proposals in their current state, would add significantly to the federal deficit due to a combination of increased proposed fiscal spending and tax cuts. In anticipation of this, we have seen a sudden increase in interest rates since the election. This occurred because there is an assumption that the federal government will have to sell more treasury bonds to fund fiscal spending, and that to attract buyers for these bonds, the government will need to pay a higher rate of interest. And, as the interest rate paid by the government rises, the overall cost to service that debt would rise, causing the deficit to increase further. This additional spending may cause inflation to heat up, which may cause the Federal Reserve Board (FED) to increase interest rates some more (the FED is already telegraphing a potential rate hike for December). Of course, tax rate decreases may add to economic vigor, with the promise of increased tax revenue associated with better economic times. However, overall, the proposals would add to the debt and likely to inflation.

We have already positioned the bond portion of most portfolios, as suitable, for an environment of rising interest rates. We are glad to be prepared – however, we didn’t envision that the Presidential election would serve as the catalyst for this this trend!

Expectations of decreasing tax revenues and increased government spending can have a positive impact on stocks (equities). We have seen some of that already since the election. That said, we’re still in the late cycle of this economic upswing, and volatility is the watchword. This is especially true since we believe that stocks have gotten ahead of themselves since the election.

The market may settle back, possibly next spring, as the new administration approaches 100 days and the reality of how our system works.

Stock segments that may benefit from the proposed reduction in corporate tax rates may be mid- sized and smaller U.S. companies: they currently pay “the full freight” in their taxes because they can’t afford the more expensive attorneys and accountants who can help them find the loopholes. You may see us adding to this area as suitable.

What about the international scene? The “Trump Effect” has invigorated nationalistic voices in Europe in particular. This tips the scales a bit more toward disunity and disruption, which makes Europe more risky from an investment standpoint. You may see us reducing international positions modestly to address this potential political risk.

In Socially Responsible Investing (SRI) portfolios, you may see a reduction in the S&P 500 Low Volatility (SPLV) position in favor of an increase in the Parnassus Endeavor Fund (PARWX). This move increases the proportion of socially responsible tools within those portfolios.

Our Investment Committee, bringing you almost 100 years of combined experience, meets every three to four months to analyze markets and trends on your behalf, developing strategies like those above. Many of the above strategies came from our recent meeting which we convened after the election. Of course, we will continue to monitor global investment developments, and will communicate and take appropriate action as we see strategies that represent potential to benefit you.

As always, please let us know your questions and comments. And, enjoy your holiday!

Investment NewsLaura Kuntz