Content provided by Case Eichenberger, CIMA, Client Portfolio Manager
I’ve received a few thoughtful questions from advisors this week, and I’d like to address them as I believe they may be on the minds of many CLS clients.
- How will President Donald Trump’s tax plan affect the economy and how are we positioning portfolios?
- The Story: Last week, Trump unveiled a broad package of tax reforms that aims to spark a sustained 3% growth rate. The proposal includes cutting the corporate tax rate to 15% (currently 35%), lowering individual rates, raising standard deductions to benefit the middle class, and repealing estate and alternative minimum taxes. Tax cuts have generated mixed results in the stock market, and the reforms must clear Congress first, so the potential impact is yet unclear. Trump has not proposed a method to pay for the cuts, which he hopes to enact in 2017, so they will add substantially to the federal deficit.
- CLS’s View: Anything to spur economic growth is generally a good idea, and who doesn’t love lower taxes?! Tax cuts may help U.S. company earnings and allow them to grow into their already-high valuations. If growth improves and earnings continue to rise, we believe S. value stocks will benefit. Value is a current CLS theme, and we are overweight to this sector. We are also strongly tilted to financials as well as small- and mid-cap firms. Even though we have a slight tilt to large-caps, we are looking hard at smaller companies. Lower taxes should make smaller firms more competitive with larger ones as they derive most of their profits from within the U.S., while larger firms make much of their profits overseas and may defer their taxes.
- Another View: Recently, a financial advisor asked me if the reforms happen and the economy and market shoot higher, am I worried our tilt to international stocks could be a bad call? The answer lies with diversification. Diversified portfolios mean CLS will hold some positions that will work well and some positions that won’t. But ultimately, we recognize policy doesn’t drive long-term returns; fundamentals and valuations do. Right now, U.S. valuations are high, which is a sign we should lower expectations and look for cheaper areas of the market. These are currently international stocks, which have performed terrifically so far in 2017.
- Are we worried about geopolitical risk, such as that posed by North Korea?
- The Story: North Korea appears to be getting more active in terms of its capabilities to develop, test, and launch long-range nuclear weapons that have the ability to hit U.S. ships in the Pacific and possibly reach as far as San Francisco. Most experts, however, doubt it could accurately accomplish this and believe the U.S. would be able to stop an attack before it started. The U.S. and China are currently in talks on ways to handle the situation.
- CLS’s View: There are always reasons not to invest, and when the market dips, negative stories show up more often and seem to make more sense. But, at CLS we don’t run to cash based on news headlines or short-term volatility. We typically buy what we like during times of stress, and at the moment, we very much like emerging markets (up 14% this year). In fact, even with North Korea acting up again (when has it not?) the countries that surround it have performed even better. China is up 16%, South Korea is up 17%, and Asian emerging markets are up 17%.
- Another View: North Korea is not the only geopolitical risk in the world. France, Italy, Great Britain, and even the U.S. have the potential to roil markets. But, because there are always reasons to scare out of the market, it’s essential to have a plan in place. As the saying goes: “Investing is simple, not easy.” We must be disciplined and not react to stories; instead we must look at fundamentals and valuations.
- Given a normal CLS core portfolio, do we feel our allocation to international stocks right now is high enough?
- The Story: An advisor asked me this question recently, and if I could have, I would have hugged him through the phone. It’s great to hear our advisors and clients share our vision for a portfolio. I told him, at 50% of equity, our international position is 10 points higher than our policy benchmark, but we have a view to add more (more on this can be found in CLS’s perspectives binder).
- CLS’s View: We all know why we like international stocks: higher yield, lower starting valuations, improving fundamentals, weakening dollar, etc. Add to that improving momentum, as international stocks have outpaced U.S. stocks so far this year, and continue to approach a technical level of support.
- Another View: We will always have a tough job ahead of us. Our belief that investing overseas is beneficial goes against most investors’ home country biases. We also believe buying assets that are on sale is beneficial to investors’ bottom lines long-term, which can often make our clients uncomfortable. But, we work with clients to help them stay comfortable throughout the process; we try to educate them and help prevent their emotions from getting the best of them. This is how our advisors and CLS earn our fee.
If you have additional thoughts or questions, please reach out to me at 402-896-7004 or firstname.lastname@example.org.