The Economist recently wrote that we now have a bull market in everything. Nonetheless, there are still naysayers. Could we be facing a “Minsky moment” whose theory was about how excessive debt threatens financial stability and morphs into instability?

The extremely low level of volatility in the markets may be tempting some to increase their risk exposure, but this may be balanced by other investors that are nervous about the future and have low expectations for long-term returns.


Will the tax bill, that was finally passed by the House and the Senate and signed into law by the President, be the key catalyst for economic growth and stronger markets as it has been viewed by many observers?  

The U.S. economic expansion is one of the longest on record, but has also been one of the weakest. Lower taxes, along with the plans to increase capital spending, should help to stimulate faster growth. A stronger economy leads to higher earnings growth and this should help us to continue to enjoy a positive market environment. 


Long-time investors caution that if everyone is thinking alike something else is more likely to happen. Have investor expectations risen too far following the passage of the tax bill, with its lower corporate tax rate and the cut in the number of individual tax brackets expected to drive the economy and equity markets higher?

There are many other factors that need to be considered, but the effect on earnings for many companies will be very positive.  This is a major accomplishment. The last time tax reform passed was under the Reagan administration and before that during the Kennedy presidency.  In both of those cases there was a positive impact on the economy. With the prospects for more deregulation and possibly some infrastructure spending, the economic outlook for 2018 is better than most expected.


What are some of the factors you are watching that might develop into risks for the economy and markets?  

The synchronized global expansion that has developed over the past year is an important driver of the increase in our growth projections.  This could be negatively impacted by the Trump administration’s talk of putting in place significant tariffs or if there is a rejection of NAFTA.


Could the Fed also be a problem for the economy?    

While interest rates stayed lower for much longer than most expected, the trend now seems to point to higher rates. The many years of monetary accommodation has ended and there is a degree of uncertainty as Powell replaces Yellen and the Fed adopts the new “financial stability” mandate.  The risk is that they might tighten too far or too fast, which could have a negative impact on the economy.


As we begin a new year, there is a natural tendency to look back at what happened in 2017 and then to make predictions about the year to come.  What is Whitnell’s perspective?

We know that past performance doesn’t tell us anything about how an investment might do in the near future. Sometimes recent trends continue, but in other situations there are reversals in the relative performance. We don’t try to make specific short-term predictions, but are able to identify investments that we believe have the potential to generate attractive returns over the next five to ten years.  Our portfolio recommendations are guided by the evaluation of economic trends and our analysis of the individual investments. No one knows what will happen next, so it is important to be well diversified and stay focused on these long-term opportunities, as the market inevitably will go through times of stress or volatility.  


What should we expect to see in the bond market and other interest oriented holdings?  

Fixed income investors have been warned that they should be increasingly concerned about capital risks. The yield on the U.S. Treasury 10-year bond has risen from a rock bottom 1.4% in July 2016 to the current 2.6%.  We believe the recent rise in rates will most likely continue in-line with the strength in the economy and the Fed’s intention to push rates higher.


Thanks, Dave, any final thoughts?

Investors must remind themselves how unusual the current market behavior has been.  We know that higher volatility is normal and can provide opportunities for investment.  Portfolios should always be diversified in accordance with asset allocation targets designed to achieve your investment objectives.  When the markets face a time of stress, having a long term focus will help you to stick with the plan.  

We appreciate the opportunities where we have been entrusted to work with our clients in the management of their investments and financial plans and we wish all of you the best for the year to come.     


Note: We have gathered the information contained in this report from sources we believe reliable; however, we do not guarantee the accuracy or completeness of such information. You should not assume that any discussion or information contained in this market commentary serves as the receipt of or as a substitute for personalized investment advice from Whitnell & Co.  No part of this publication may be reproduced in any form or referred to in any other publication, without express written permission. Whitnell & Co. is an SEC Registered Investment Adviser.