LCM Capital Management Market Commentary

2016 Year End Review

Happy New Year

"Life is a struggle - Fight it, Life is a goal - Achieve it
Life is a puzzle - Solve it, Life is eternal - Believe it
-Author Unknown

2016 was a reiteration of what LCM Capital Management has always professed, mainly the experts are only guessing and they are wrong more often than right. It is time in the market, not timing the market while keeping costs low and staying diversified across all assets that will benefit investors over time.

The new year always brings with it forecasts from retail brokerage/bank firms as to where the markets and economy will be at year end. Last year for example, there were two main predictions: no Brexit and no Trump victory. The market reacted instantly to both of those events. With Brexit, the S&P 500 dropped 6% in two days and then rallied 5% over the following two days. The evening of the U.S. Elections, S&P 500 futures were limit down, meaning they actually stopped trading. Yet, by the day’s end they had rallied over 4% from the bottom and continued to rally through year’s end by almost 5%, putting the year end total return for the S&P 500 at 9.54%. Even though 2016 started with the worst opening week in history and was down over 10.50% at its low in early February, if one looked at the market on 12-31-2015 and revisited the close of 1-1-17, they would have thought nothing of the year. This emphasizes LCM Capital Management’s beliefs in managing money. We only ask that you ignore all these predictions for 2017 since the majority will be wrong.

The Trump Rally is based on a pro-business, U.S. economic driven jobs focus coupled with more domestic spending and fewer regulations, in the hope of stimulating our slow growth and part time work environment. Theses expectations however will have to be followed by actual policy implementation. In the several months following the January 20th inauguration, we expect to see some wild market and sector swings as various aspects of the new policies are digested.

While major stock indices enjoyed a positive year, the bond market went through one of its worst years in decades. The U.S. 10 year Treasury bond reached its lowest yield on record July 8th at 1.366%. It closed 2016 at a yield of 2.45% – an 80% correction in just over 5 months. This explains the drop in bond prices on client statements, but those extreme movements did not garner much attention from the media.

Year over year the change was less volatile, being down 8%. This was due to the rumors that there would be several rate increases by our Federal Reserve Board. The Fed did raise rates once, at their year end meeting. There are predictions for 3 increases in 2017. LCMCM finds this very unlikely based on our country’s massive and growing national debt and budget deficits, not to mention the amount of leverage in the system. Obviously increasing interest rates will affect areas of concern, particularly, housing, student loans, sub prime car loans, and commercial real estate. If economic growth returns as anticipated, we can withstand the rate increases. However, if it does not materialize, then taxes will have to be drastically increased, which is contrary to what President Trump and the Republicans are talking about.

Regarding global interest rates, the European Union (ECB) left rates unchanged but extended their bond-buying (QE) from March of 2017 to December of 2017. Not exactly a vote of confidence in the EU’s growth. Ironically, Japan has now become the U.S. government’s largest debt holder, surpassing China with over $1.131 trillion, since their own debt on many maturities remain at a negative yield.

Forecasting, 2017 municipal bonds, which are still LCM Capital Management’s favorite fixed income vehicle of choice for our high net worth clients, have also come under recent pressure due to anticipated lower tax rates (which on the personal versus corporate will be a harder sell for Congress). These vehicles now yield as much as their taxable counterparts, which historically is unprecedented. Even if tax rates drop, these bonds will still be worth more to our clients on a taxable equivalent basis. If tax rates are not lowered these vehicles become even more valuable.

U.S. stocks should outperform most foreign stock returns as we struggle to reduce years of government over spending, taxes, and onerous regulation, but it will be worth the fight.

We thank you for your continued number of referrals and for your ongoing trust and business as we build the most transparent, low-cost, fiduciary-focused private money management firm in the country. As always, if your risk tolerance or financial situation has changed, please contact your advisor or LCM Capital Management directly.

LCM Capital Management, Inc.

The view expressed reflects those of the authors as of the date of this commentary. Any such views are subject to change at any time based on market or other conditions, and LCM Capital Management (LCMCM) disclaims any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for LCMCM are based on numerous factors, may not be relied upon as an indication of trading intent on behalf of LCMCM. Thoughts about investing, the direction of the market, and individual securities are based on the author's own analysis and are not representative of actual future performance. Investing involves risk including the possible loss of principal.