Nothing is more responsible for the good old days than a bad memory

January 13th, 2017

“Nothing is more responsible for the good old days than a bad memory”
-Franklin P. Adams

The beginning of 2017 marks the 45th peaceful transfer of executive power in the United States. While we’re a week away from the inauguration of President-elect Trump it seems like the transfer of power occurred on November 8th given all the attention garnered by Mr. Trump’s tweets. Mr. Trump’s unconventional style will evolve after he’s assumed the Office of the President, but we do expect there will continue to be surprises.

Despite the uncertainty of the last year, the economy is exiting 2016 in good shape. The US GDP advanced 3.5% in the third quarter, its highest growth rate in two years as personal consumption and investment in structures and intellectual property were stronger than anticipated. For the full year it is projected that GDP advanced 1.9%, and that it will move slightly higher in 2017 to 2.1%. Unemployment continues to be favorable, running at 4.7% in the most recent period. There are modest signs of wage inflation as average hourly wages have risen steadily which could help consumer spending.

Policy makers have two key tools with which to influence the economy: monetary and fiscal policy. In recent years the Federal Reserve has relied heavily on monetary policy to stimulate the economy. There have been numerous quantitative easing programs introduced since the financial crisis and interest rates reached historic lows with the ten year Treasury bond touching 1.358% last July. The Fed Minutes from its December meeting suggest the Fed members want to move interest rates back toward neutral levels and that the current economic environment will permit the rate normalization. Looking into the uncertainty of 2017 there are a few items that seem likely. Corporate income tax reform will be evaluated, and Congress is likely to pass an infrastructure spending program. In fact, the minutes from the Fed meeting reveal that the pace at which interest rates will rise is in the coming year will be influenced by the eventual tax and spending programs enacted under the new administration. We will be watching closely.

On the corporate level, companies owned in client portfolios reported third quarter earnings growth of 13.8% vs. overall reported S&P 500 earnings growth of 3%. We believe that further advances in stock prices will continue to be dependent upon earnings growth given the slightly expensive valuation of the stock market. Therefore, we’ll continue to strive to identify quality businesses with defendable market positions run by excellent management teams to add to client portfolios.

During the quarter there were some changes made to client holdings. We purchased shares in Littelfuse, Inc, a manufacturer of fuses and circuit protection devices. We also bought shares in Wells Fargo & Company to increase our exposure to interest rate sensitive stocks. We sold shares in CVS Corporation, Cerner, and Emerson Electric to book tax losses in positions that had failed to live up to our expectations.

We can all agree even the “good old days” were full of uncertainty and anxious periods. The recently completed Presidential election was very divisive, but our country has been through challenging times before. America will persevere once again and we will remain focused on being responsible stewards of client wealth.

Sincerely,

JM Sam Nevin, Jr.
Managing Partner

AyrshireCapital_Q4_2016.pdf

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