Higher Rock Education - Economics Blog

Thursday, January 19, 2017
I would like to thank Mr. Sharples, the owner of MKS Wealth Management for permitting us to publish his newsletter as a blog. Mr. Sharples serves on Higher Rock Education's Board of Advisors. He has served my family for the past decade. I really enjoy his perspective. His insights are always valuable. Most importantly, Mike Sharples is a great friend. While we differ a bit on our view of 2017, I thought it would be worthwhile to share his newsletter. I encourage you to visit his website at www.MKSWealth.com. Please share this blog post with any economic students, teachers, or interested investors who may benefit from Mr. Sharples's understanding of the economy.

MKS Wealth Management - Perspective;......... January 2017 Edition


I've read several 2017 Outlooks (listed below) thus far and two key elements are consistent.
Firstly, the predictions for investment returns are modest. The majority of the stock market outlooks are between 5-7%, with the highest outlier being 10%. The common predictions for the aggregate bond market are 2-3% but there were also predictions for potential negative returns this year. The delicacy of returns revolves around inflation accelerating more than the anticipated 2-3% as well as whether the Federal Reserve increases rates more rapidly than they have forecasted (as of December's meeting the prediction was for 2-3 increases in 2017).

Secondly, there are a great many unknowns. The most named are: What will, and what will not, get done in the first 100 days of a new presidency? Will there be a trade/tariff war? How will relations develop or deteriorate with China and Russia? It appears to me that if 70% of the current Republican legislative "wish list" is enacted, no trade war develops, and the relationship with China and Russia are maintained at the current wary, but tolerant level then the 5-7% stock market return would be on track for 2017. The other general consensus among pundits is a low probability of a recession in 2017, but if the economy were to "overheat" with GDP rising significantly above 3% along with interest rate increasing faster than the Fed's prediction, then this "long-in-the-tooth" bull market may tip into a recession in 2018.
Remember when we were waiting for oil to fall below $20.00 a barrel (WTI)? That was last year in the first quarter- it bottomed at $26.21 on February 11th. Then we didn't think it would break $45 let alone stay above it? But by late June, oil was back at $50 a barrel and has stayed roughly between $45 and $50 through the 2nd half of 2016 (currently it's about $53). So what's my Point? Well, it appears the "Outlook" predictions for 2016 were not very accurate. The year-end performance estimates may have been close to prediction but the way the markets got to that end point was much different than most pundits predicted. The first quarter of 2016 gave a negative return for the stock market indexes, while the second quarter provided a recovery with a break out to positive territory occurring after the unexpected "Brexit" vote's two day drop reversed course to set new market highs. The third quarter drifted sideways as we moved toward Election Day, the bulk of 2016's return came in the latter half of November and early December. Most of the 2016 stock market predictions were calling for a positive year but very few predicted it would be a 10% return or better. The year-end return of the indexes was difficult to believe possible at one point in the first quarter of last year. There were many predictions for a positive year because election years have tended to be positive return years for the stock market, but the rollercoaster ride to get to that return was a difficult one. The unexpected events of a vote for Brexit and a Trump Presidential win that were supposed to be negative market events turned out to be the opposite.
There are always many possibilities for the future, but those possibilities have a wide variety of probabilities. The most probable future is not one that is as dire as some predict nor as euphoric as others predict, we usually end up somewhere in the middle. What we need is to have a plan. A plan for the markets continue to progress as the consensus predicts, a plan for what to do if major shifts occur to that outlook both for the positive or the negative, and a plan for the unforeseen events that are the cause of major distortions to the markets. In my opinion this plan means that you have enough cash on hand for an emergency and expenses for about 6 months and for the unforeseen disruptions (which tend to be short term in nature), your portfolio contains some portion of income producing investments that tend to be less volatile in a negative economic scenario, and your portfolio contains some companies that are likely to grow in value based on the current economic and business outlook. The last part of the plan is to be able to change your portfolio should economic conditions change, but to do it in a thoughtful and methodical way versus being reactionary. This is the difference between being an investor versus a speculator.

My bottom line:
I know this is not profound, but I believe the following is as essential for investing success as it is on any voyage. Check to see you have adequate provisions and emergency equipment, and check your compass bearing to set your course. We will try to avoid bad weather, but unfortunately we'll have to endure some (it usually doesn't last, even though in the midst of it you may feel otherwise), and make sure your vessel is seaworthy. May we all have "fair winds and following seas".

Mike Sharples CFP
Managing Partner


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