2016 4th Quarter Commentary –
THE U.S. STOCK MARKET HITS NEW HIGH!
Since the U.S. Presidential election, the Dow Jones Industrial Average has risen 1,803 points, from 17,959 on November 9th to 19,762 (on December 30th.) The 2016 Presidential election had the two most controversial candidates in memory. Americans had very strong feelings about which candidate was the best and which was the worst. Regardless of how you feel about the candidates, Mr. Trump won the election. Whether you agreed with Trump or disagreed with Trump, the important thing is to look at the things he is proposing:
1. He intends to roll back excessive regulations in many industries.
2. He intends to lower corporate income taxes.
3. He intends to repeal and replace the Affordable Care Act (Obamacare).
In terms of helping the economy, we believe one of the most important proposals would be the rollback of excessive regulatory barriers. In order to illustrate the impact of excessive regulation on U.S. businesses, it is important to go back to some previous commentaries.
1st Quarter Commentary – March 2009:
“Imagine several people sitting around a Monopoly board. One owns Boardwalk, another owns the railroads, and still another owns the utilities. While they are in the middle of their game, someone enters the room and announces that the rules of the Monopoly game are going to be changed. Immediately everyone playing the game would ask, ‘What are the new rules going to be?’ At that point the person who entered the room would say, ‘We don’t know yet, but they are going to be major. Just keep playing and we’ll tell you later.’”
Obviously, this sort of thing would cause all participants in the game to hold on to their cash until the rules were clarified.
2nd Quarter Commentary – June 2014:
“The last time we checked, the S&P 500 companies were still holding approximately 40% of their assets in cash and money markets. Many feel this is due to regulatory uncertainty. Speaking of uncertainty, no one knows exactly how well the Affordable Care Act is working.”
1st Quarter Commentary – March 2016:
“It isn’t just the regulations. U.S. industries have been dealing with regulation for years. It is the speed at which the regulations are being issued and the random timing of them. In order for companies to plan their business strategies, (which include expanding facilities, hiring, research, new products and services) they need to have regulatory stability.
“As a consequence, the S&P 500 Companies currently hold $1.44 trillion in cash. This is an unprecedented situation. When asked why so much is being held in cash instead of investing to expand their businesses, many CFOs (Chief Financial Officers) respond by saying, ‘a fear of the unknown.’”
It is absolutely undeniable that the massive increase in regulations and the uncertainty about when they would be issued has affected our businesses in the United States. Businesses have to make long-range decisions, such as building new factories. They can’t move ahead on a decision like that when there might be a new regulation which would cause all of their money to be wasted. Many companies have continued to hold assets in cash while waiting for a more stable regulatory environment.
The Trump administration’s proposal to roll back unnecessary regulations has been met with a great deal of optimism in the business community. If the new administration follows through on its proposals, we would anticipate the long-awaited U.S. economic recovery. Historically, strong underlying economies have tended to support better stock and bond markets over time.
Sources: The Wall Street Journal, ICON Portfolio Update, Jennison Dryden Investment Research, U.S. Bureau of Labor & Statistics, Factset.com, CFO.com
These are the opinions of Financial Professionals, Inc. and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice.