Jul 19 2017
July 19, 2017

First half of 2017… In the Books

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The first half of 2017 is in the books.  And perhaps the best performing half of the year is behind us.  Or, maybe not.  The Trump presidential win and the market’s belief that his healthcare, tax, and regulation reform would drive positive market conditions was the driving force for the first 6 months of 2017.  The Republican Party’s failure to act dampened that belief.  However, Senate Republicans have agreed to shorten their summer vacation to work hard at coming to agreement on healthcare.  Success could lead to tax reform and that would lead to an extension of the bull market.  Already one of the longest in history.

There were several other factors at work in the 2nd quarter.  Most prominent was the move by the FED and the European Central Bank to indicate that their hands were on the spigot ready to reduce the free money flow which has been the market’s primary driver for the past 8 years.  The FED has been most active, raising their rate by .25 and threatening to do so again two or three more times in 2017.  The bet is now that there will only be 1 more rate increase this year.  But additionally, the FED has indicated it will begin unwinding its 4 trillion-dollar bond portfolio starting in September.  When the FED moves from buying to selling treasury and mortgage bonds, interest rates will rise.  If you have any interest rate that is not fixed, you will quickly see the impact.  Meanwhile, inflation continues to be a problem for the FED, because there is very little of it.  Perhaps the new normal is an inflation rate under 2%, or, it could be indication of an underlying problem in the global economy.  Deflation.

The FED’s move to raise rates has brought the bond market rally to a halt.  Treasury rates rocketed up during the month of June.  Rates go up as bond prices go down.  Oak Springs has not held treasury positions since the summer of 2016.  The dollar has been weakening since its high mark in November.

Gold was the fastest rising asset for the first 5 months of the year but then began to fall as the overall commodity market had a sharp pull back.  Typically, not a good sign.  A growing economy would normally increase the demand for commodities and push prices higher.

A significant change in the market’s reporting period for the 1st quarter was a move to a fundamental market versus a market propped up by free money and companies buying back their own stock.  A closer look showed that the US companies with positive revenue and earnings were typically companies doing business outside the US.  In fact, our positions in the international and emerging markets have been our portfolio’s best performers for the year.   Earlier in the year we increased our exposure to those markets while reducing our exposure to the domestic market.