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January 23, 2017
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    From Russia With Love

    From Russia With Love – remember Ian Fleming’s second incarnation of 007, James Bond, played by Sean Connery? The British secret agent was sent to Turkey to aid in the defection of Soviet consulate clerk, Tatiana Romanova, where SPECTRE (SPecial Executive for Counter-intelligence, Terrorism, Revenge and Extortion) was planning to avenge 007’s killing of the original Bond villain, Dr. No. I know it might be hard to believe, but in the film Bond narrowly escapes death several times only to accomplish his mission in the end and sail off into the sunset with a beautiful woman. Released in 1963, From Russia with Love took in more than $78 million globally (versus a $2 million budget) and propelled the Bond spy series into what would one day become one of the most iconic movie brands in Hollywood history. Sorry, I couldn’t resist… with all that’s transpired since the election, this title was just way to easy, wasn’t it? And it looks like it might take more than a booby-trapped briefcase, explosive pen or bullet proof Aston-Martin for President-elect Donald Trump to accomplish his mission over the next few years. Q was clever at providing 007 with surprising gadgets, but only time will tell if Trump’s team has the requisite gadgets in place to provide their constituency with the tax and regulatory reform, infrastructure incentives and wage growth they voted for and fully expect. Perhaps one day, if we see the President-elect introducing himself to foreign leaders as, “President Trump, President Donald Trump”, then we’ll just have to Live and Let Die. Ah oh… there I go again!

    Looking back on 2016 we saw three pullbacks (Feb., June and Oct.) followed by three recoveries: the Feb. oil swoon to $26.05/barrel was the worst of them, with more than a trillion dollars in U.S. energy infrastructure on the verge of collapse, thousands of bankruptcies being predicted and the solvency of American banks once again at stake; then June’s fall reflected growing concern that domestic companies weren’t making any money and their forecasts didn’t look any brighter; and finally, the Oct. pullback was simply a call on our nation’s fatigue over a torturous Presidential campaign season and the fate of our nation’s political future – “please end it already”, we sighed. Through it all, the sideways market that had been in effect since March 2014 gave way to a July breakout – a significant advance considering its two and a half year trading range – and then a post-election rally to confirm a new trading zone. With that, here are 2016’s final index returns and price movements:

    2016 Index and Asset Class Total Returns

     S&P 500 = 11.9%International Emerging Equity Markets = 11.6%
    NASDAQ = 8.8%      US Bonds Aggregate = 2.6%
    International Developed Equity Markets = 1.5%     Cash Lipper Money Market = 0.1%

    Other Notable 2016 Sector Returns/Price Changes

    Health Care = -2.7%Gold = 8.1%
    Financials = 22.8%Oil (WTI) = 46.9%
    Real Estate = 3.4%Dollar per Euro = 3.6%

    So, what now you ask? Stocks are not cheap. They have stalled on their way to DOW 20,000 and corporate earnings must improve for equities to continue their rise. But as we await companies’ Q4 earnings, we also await an inauguration (and likely increased market volatility). Equity sentiment has undoubtedly turned positive since the election, but Americans are still cautious of a Trump presidency. Yes, consumer confidence has jumped to a 16-year high and the market may push through 20,000 early this year on the hopes of lower taxes and reduced regulation, revived industry and higher wages, and repatriated overseas cash and fruitful trade agreements, but those are all “if’s” that must become “when’s” for the market to continue its climb. Bottom line, unless more people start participating in the workforce it could be difficult for Trump to maintain the current pace of wage gains – and labor pressures and eventually inflation could preside – prompting the Fed to consider two or three interest rate hikes this year (watch out bonds!). This could slow domestic demand and strengthen the dollar, and the Trump administration will have to adjust appropriately. If they can adjust and also meet some of their campaign promises, then economic growth could expand and the markets could tread higher in 2017. For now, though, all we can do is remain diversely invested and watch to see if the U.S. is truly on a sustainable growth path. If so, then the market may think Trump really does have a Goldfinger. Oops… that’s the last one, I promise!

    Posted by Ford Lankford

    Ford N. Lankford is a Portfolio Manager at Russell Capital Management (RCM). He manages investment portfolios and consults on investment planning for personal and institutional clients, as well as retirement plan sponsors and participants. Read more ›