What’s On Our Minds:

Interest rates are, to put it mildly, a complex beast. There are a few mechanisms by which rates affect the economy and the stock market, not all of which are obvious, but which have large effects. We’ve tried to break down these levers without getting too granular or using financial jargon.

The first is the most obvious: a lower interest rate means it’s cheaper to borrow. Consumers borrow more money to buy houses or cars, businesses borrow money to expand production. And thus, we get economic growth. Everybody’s happy. Except, maybe, the people who get less money in interest for loaning out their hard-earned cash.

An interest rate raise, like the one that seems imminent, is a signal that rates are moving higher, might cause both consumers and Chief Financial Officers to cut back on spending. So businesses earn less, and earnings fall.

Another very important but more abstract concept is the valuing of stocks via a discount rate. If I think a company is going to earn $10 million in ten years, the interest rate would have to be 0 for me to want to buy its stock now for a $10 million valuation. But if interest rates are higher, I’d be better off just putting the money in the bank for ten years and earning some interest in those ten years. In this way, investors compare interest rates with their expectations for the earnings of companies. If interest rates are low, companies’ stocks are more attractive, and therefore worth more in today’s dollars.

When Janet Yellen and the Fed meets this month, they have to think about all of this, with the added complexity of inflation. The inflation target is 2-3%: at this level, prices are fairly stable, but there is incentive to spend, rather than save, money, and to push the economy along. With inflation at zero, you know that the car you want to buy will cost about the same in year, so you might just think about it for a while, dampening economic activity.

Deflation, when inflation falls below zero, is a major problem: here, you might wait to buy that car, since it will be cheaper next year. And the year after that. And…

This gives rise to the “pushing on a string” phenomenon that was one of our founder Jim Hardesty’s favorite metaphors. You can’t entice people to spend money by cutting rates indefinitely, since rates below zero (usually) are avoided by simply keeping the cash. This illustrates, in part, one of the major limitations of monetary policy (setting interest rate, money supply, etc.) vs. fiscal policy (where and how the government spends their money). But fiscal policy is a topic for another post.

Last Week’s Highlights:

For the fourth straight week, stocks increased and closed at record highs on Wednesday. Donald Trump laid out an optimistic vision of the country during his address to Congress on Tuesday evening. Economic data was strong last week. Consumer confidence reached a new high and the ISM Non-manufacturing index, which measures business activity and employment trends, rose to a level last seen in October of 2015.

Warren Buffet shared that Berkshire Hathaway had taken a larger position in Apple stock earlier this year.  It’s now one of their largest equity holdings.

Target shares had a rough week as they decreased 14% in value after the company announced it had missed earnings expectations. The company reduced profit targets and said they are focusing on investing in stores and lowering prices to bring back customers.

Snapchat went public on Thursday. Shares surged from their $17 IPO price to as high as $26.05.  The company is now worth about $33 billion even though it lost $515 million last year.

Looking Ahead:

Companies continue releasing earnings reports this week. Armstrong Flooring and Korn/Ferry International report first quarter results on Monday. On Tuesday investors will hear from Dick’s Sporting Goods and Navistar International. Breakfast chain Bob Evans Farms reports results on Wednesday.

February’s jobs report will be released on Friday. A surprise to the upside would likely increase prospects for the Fed to raise interest rates after their 2-day policy meeting on March 15^th.

On Friday, the Department of Labor will issue a report detailing the status of its new fiduciary rule. President Trump has mentioned he might cancel the new rule’s implementation.

What’s On Our Minds:

Everyone remembers the old saying, “don’t put all your eggs in one basket”.  Well, sometimes investors end up with a whole lot of their eggs in one basket whether it be intentionally or unintentionally.  Often times, entire fortunes are tied to the prospects of one single company and while this is great when business is good, it can get ugly when the tides turn.  Large individual positions in companies are acquired every day through employer retirement plans, inheritances, stock options, and business sales.  It’s not unusual for successful professionals and executives and their heirs to find themselves with too much of a good thing: owning a large quantity of highly appreciate stock or a large equity position in a private partnership.

While countless individuals and families have accumulated great wealth by holding large amounts of a single position, betting your financial future on a concentrated position is rarely the best course of action.  Even if an investor has the utmost faith in their largest holding, the return prospects simply are not worth the risks.  If you are approaching retirement age and will need to start living off of your investment portfolio, a concentrated position can create a problem because your long-term financial security is dependent on the success of a single business.

The only way to reduce the inherent risk of a concentrated investment portfolio is to diversify.  Of course, this is easier said than done!  Due to the bite of capital gains taxes, fully selling out of a concentrated position can be a long process, but over time an investor can sell a certain amount of shares, per quarter, or per year and reinvest the proceeds into a well-diversified account.

At Tufton Capital, we take a customized approach to wealth management which allows us to manage the complex situation brought on by a concentrated portfolio.

Last Week’s Highlights:

Equity markets continued their 5-week trek higher last week. The Dow Jones closed at 20,822 on Friday, which was a record high.

A better-than-expected earnings season has helped stocks move higher. Nearly 66% of S&P 500 companies have reported earnings above analyst estimates.

Treasury Secretary, Steven Mnuchin, laid out an ambitious time frame last week saying that a tax-reform package could be passed by Congress before their August recess.  He also said that the Trump administration is aiming for sustained 3% or higher economic growth.

While equity markets have been chugging along, bond investors have been hunkering down recently. Despite a reflationary trade in stocks and expectations of an interest rate hike in by June, the 10-year U.S. Treasury ended the week at 2.317%, its lowest since last November.

Looking Ahead:

On Tuesday evening, President Trump will address Congress in a televised speech. A lot is expected from this speech as he will lay out his plans for the rest of the year. He will likely touch on his fiscal-policy plans, and discuss tax reform, border security, healthcare, and future infrastructure spending plans.

Economic data from January is coming across the wire this week.  Retail sales will be reported on Tuesday. On Wednesday, construction spending and automotive sales will be reported.

What’s On Our Minds:

The “Trump Rally” or “Trump Bump” continued the Tuesday morning after President’s Day. Since the election, sectors that had underperformed the S&P 500 began to rally on the back of the possibility of higher interest rates, stronger economic growth and President Trump’s agendas. The Financial sector, which includes the “Big Banks”, Insurance companies, and asset managers, has led all sectors with a 23% return since President Trump’s win. In the more cyclical sectors, Industrials are up nearly 13%, while the Materials sector is up 11%. Consumer Discretionary and Technology also barely outperformed the broader index with a roughly 10.5% return from each sector. Health Care, Telecom, Consumer Staples, Energy, REITs and Utilities sectors have all underperformed after mostly leading in 2016.

Looking “under the hood,” higher interest rates will help earnings growth for the banks as their loans spreads widen, creating higher profits. Investors are also speculating that President Trump’s plans for deregulation will allow the financial companies, specifically the systematically important financial institutions, to hold less capital, which would give them the ability to lend more.

Industrial companies have rallied on speculation that President Trump’s infrastructure plan will translate into new orders for the group. Leaders include United Rentals, which is up nearly 69%. The company rents construction equipment and tools to the construction industry. Other beneficiaries of infrastructure investment would include the railroad companies as they would be utilized to transport the new orders from the industrial companies. As a result, CSX Corporation and Norfolk Southern Corporation are up 52% and 29%, respectively.

Investors also believe that the Materials sector will benefit from stronger economic growth and potential inflation. Earnings growth would be expected if further demand for their raw materials and products created price increases to their customers. Material leaders include steel manufacturer Nucor, paint maker Sherwin Williams and chemical producer LyondellBassell Industries.

Of the S&P 500 companies that have reported 4^th quarter results, 68% of them have beaten on earnings. However, only 52% of the companies have beat their sales estimates, suggesting that companies are growing earnings more through cost cutting than growth of their business. The market may keep making new highs on the back of potential policy changes, but eventually, sales growth will have to follow.

Last Week’s Highlights:

Stocks extended their winning streak last week as both the S&P 500 and the Dow Jones gained over a full percentage point.  The Trump rally continues.  Investors remained euphoric as most expect President Trump to reduce U.S. corporate taxes and introduce some sort of fiscal stimulus package.  Strong earnings reports along with robust economic data have also helped to push indexes to record highs.

Janet Yellen took a hawkish stance last week during her testimony to Congress.  Her tone increased the odds that the Fed will raise interest rates before their next policy meeting in June.  Her latest stance on rates helped push the financial sector higher.

Kraft Heinz offered to acquire Unilever last week.  However, over the weekend, Kraft said it “has amicably agreed to withdraw its proposal.” Unilever shares took a hit on the news.

Shares of Boeing enjoyed a 1% bounce on Friday when President Trump visited their South Carolina manufacturing plant.  Shares of Campbell Soup Co. decreased 6.5% last week because second quarter profit and revenue missed.

Looking Ahead:

Markets were closed on Monday for President’s Day.

This week, investors’ attention will be focused on economic data reports and minutes from the latest Federal Open Market Committee meeting.

Earnings reports from retailers will also be on tap this week. Wal-Mart, Home Depot, and Macy’s release earnings on Tuesday and Nordstrom reports on Thursday.

On Saturday, Warren Buffet will release his annual letter to Berkshire Hathaway shareholders.

What’s On Our Minds:

At Tufton, we are value investors. We seek to purchase securities trading at significant discounts to our internal assessment of their values.  Our value philosophy is based on the principles of Benjamin Graham.

If anyone could be considered the father of modern stock analysis, it would be Ben Graham. During the ‘30s, ‘40s and ‘50s, Graham pioneered the ideas of “value investing” and taught the next generation of investors to see the difference between stock evaluation and market speculation.

Graham is possibly the most academic-minded investor of all time. He not only took a purely mathematical approach to investing but also used his knowledge to improve his principals and formulas to educate future investors.  The heart of Graham’s strategy was value. He did not purchase shares assuming a company would have success with a new product or venture. Instead, he found companies that already had solid book values but were selling for below their logical price. He spurned the idea of buying trendy or on-the-rise stocks and believed most investors were just speculators.

Graham’s principles would have no credibility if they had not proved so effective. His concept of a close analysis of a company’s books proved to be extremely useful in an age when few others were doing the same. On one occasion, Graham’s analysis found that the Northern Pipeline Company was trading for $65 a share when it had bond assets worth $95 a share. He purchased a large number of shares and convinced the company to sell the assets, resulting in a $70 dividend. Graham walked away with a huge profit, simply because he was willing to look at the fundamentals of a company.

Graham’s lessons are still a foundational part of modern investing, but his teaching career is possibly best known for the students it produced. Warren Buffett, Walter Schloss and David Dodd are among the most famous students Graham taught at Columbia. Their successes have inspired a new generation of investors and have created a continual public interest in Graham’s theories.

These days, the epitome of Graham’s teachings lives on in his two popular books Security Analysis (1932) and The Intelligent Investor (1949), both of which are still in print to this day.

Last Week’s Highlights:

Major market indexes were up about 1% last week. The Dow Jones and the S&P 500 closed at a record high on Friday. The market rallied toward the end of the week after President Trump said he would announce his “phenomenal” tax plan in coming weeks.  His plan is expected to include a massive cut in corporate tax rates.  Based on last week’s move, it’s clear that investors are optimistic that a reformed tax code will benefit U.S. companies.

On the economic front, the cost of imported goods increased by 0.4% last month, mostly because of rising oil prices.

Despite a court’s decision last week that upheld Obama’s fiduciary rule, the Trump administration is working on a proposal to delay the April 10^th implementation.  A Texas court upheld the rule and rejected a lawsuit filed by business groups that challenged the new regulation. The court ruling could make it tough for Trump to make substantive changes to the new rule in the future.

Looking Ahead:

Federal Reserve Chair Janet Yellen is giving her semiannual testimony on the economy and monetary policy before a Senate committee on Tuesday.  Most are expecting her to stick to the message of three interest rate hikes this year.

Earnings season continues this week. Teva Paramedicals reports earnings on Monday.  On Tuesday, Noble Energy, Vornado Realty Trust, and Discovery Communications post their results. Wednesday we will hear from Pepsico. On Thursday, we get results from Avon Products and TripAdvisor.  We will finish the week on Friday with reports from Campbell Soup and V.F. Corp.

What’s On Our Minds:

What’s on our minds is the same thing that’s been on everyone’s minds lately: the Trump Presidency. We are going to take off our political hats for a moment and put on the economist’s cap. What effects will the Trump White House have on the economy?

(image source:  k schirmann getty images/cnn money & Gwen Sung getty image/cnn money)

The Good

There are promises for many kinds of stimulus that would help the economy grow. A “Highway Bill” or other fiscal stimulus would work differently than monetary stimulus by actually spending real dollars and putting people to work, rather than adjusting federal interest rates, etc., to influence how financial institutions borrow and lend money.

However, the difficulties that the Republican Congress has had in repealing Obamacare something that was supposed to be priority #1, may forebode a long road to serious fiscal action.

Likewise, sensible tax code reform and reduction in financial and other regulation could boost business, but getting there may be more difficult than some had imagined.

The Bad

The “Trump Effect,” whereby a presidential tweet can make or break a company, a treaty, or a trade deal, seems to have had some destabilizing effect. It would be best if the president could tone down the speed and content of his tweets.

Tariffs, too, while good for headlines, are almost universally scorned by economists. They result in a net loss for a country in financial terms. While American businesses may gain on an individual level, American consumers pay the price.

Finally, the tax code overhaul could have “debt spiral” consequences if it is overzealously applied. The results of tax reform are often complicated, and it may be unwise to push a large reform through quickly.

The Uncertain

In geopolitics there is a huge question mark. What will the country’s relationship be with Russia? Are Trump and Putin secret friend, secret enemies, or neither? Will we let Russia’s influence continue to grow in the former USSR and China to become a major world power? Or are we going to reassert ourselves as the global leader both in finance and the military?

In healthcare, Obamacare seems to be on the way out. What will replace it? Trump has said we are going to “take care of everyone,” but what does that mean? Importantly, insurance companies might be in the crosshairs, no matter which way this goes.

And what about that wall? Limiting immigration is certainly bad for the economy as a whole. Will we decide that the security gains are real and worth that sacrifice? What would the effect be on our major trading partners?

Tufton is watching all of these topics carefully. Our long term views on the stock market did not (and likely will not) change, but we continue to be vigilant in guiding our clients’ investments around any stumbling blocks.

Last Week’s Highlights:

Equity indexes finished the week close to where they began.  Markets sold off early in the week but rallied by almost 1% on Friday after a strong jobs report and news that President Trump signed an executive order aimed at rolling back financial regulations.  The market rally was led by Financial stocks.

The US Federal Reserve left interest rates unchanged at its first meeting of 2017.  The fed’s Open Market Committee noted improved consumer and consumer confidence.  Currently, market participants are expecting two, twenty-five basis point increases on interest rates this year.

So far this earnings season, 65% of S&P 500 companies beat mean earnings per share estimates and 52% have turned in better than expected sales figures.

Looking Ahead:

4^th quarter earnings season continues this week with 84 of the S&P 500’s companies are scheduled to report earnings.  Sysco reports on Monday. General Motors and BP report on Tuesday. Exelon and Allergan report on Wednesday. Thursday we will hear from Twitter and Coca-Cola and on Friday we will hear from EMC.

Lately, it appears investors are taking their cues from President Trump as everyone is focused on what his policies mean for the economy and individual companies.  We expect that to continue this week.

What’s On Our Minds:

As education costs continue to rise year after year, the expenses have become an even larger component of a family budget.  According to CollegeBoard.org, four years at a private nonprofit college, including tuition, fees, and room and board costs roughly $175,000 and a public four-year in state college, while less expensive, costs close to $80,000.  One of the best options for families is to save for future education costs by opening 529 plans for their children.

Anyone can open a 529 plan and may list anybody of their choice as the plan’s beneficiary. Also, the plan’s owner can change the beneficiary at any time. For Maryland residents, contributions to the account are tax deductible against your state income tax.

While the state income tax deduction is a good benefit, the real power behind a 529 comes from the tax-deferred growth and tax-free withdraws the the plan allows.  Distributions from the account are tax free so long as the funds go towards education expenses such as tuition, room and board, fees, books, or the purchase of necessary computer technology.  With a long term investment horizon these accounts can grow into considerable assets.  There will be added peace of mind knowing you don’t have to dip into your own personal savings to pay for college and your child or grandchild won’t be burdened by student loans when they graduate.

Tax issues around 529 plans get a bit complicated in that they count as a present interest taxable gift to the beneficiary of the account.  Because contributions technically qualify as gifts, limit your contributions to $14,000 per person to avoid paying federal gift taxes.  When saving for education costs it’s important to remember, the earlier the better!

Last Week’s Highlights:

Last Wednesday, for the first time in history, the Dow Jones Industrial broke through 20,000.  The new high water mark was celebrated on Wall Street.  The S&P 500 and the Nasdaq also closed at record highs on Wednesday.   In general, investor sentiment was up last week and it seemed that many were optimistic that Trump’s economic policies will initiate a growth period.  Since the election, the S&P 500 has risen 7.2%.

Some merger news broke last week. Verizon is considering a merger with Charter Communications and Johnson & Johnson agreed to purchase the biotech firm, Artelion.

In economic news, it was reported that fourth quarter U.S. GDP increased by 1.9%.

Looking Ahead:

The Trump Rally has stumbled a bit going into this week after the President issued an executive order last Friday barring immigrants from seven Muslim-majority countries from entering the US.  The Dow opened below 20,000 on Monday morning.

Earnings season continues this week with Apple, Exxon, and UPS reporting on Tuesday. On Wednesday, the FOMC releases a policy statement on interest rates. Investors are not expecting the Fed to increase rates.  On Thursday, Donald Trump is planning on announcing his Supreme Court nominee and International Paper and Merck release their quarterly results. On Friday, we close out the week with Hershey reporting earnings.

What’s On Our Minds:

Acquisitions in the oil patch are finally back in style. Over the past few weeks, several multi-billion dollar acquisitions have occurred, particularly in the Permian Basin of West Texas. The Permian Basin has been established as the most prolific shale patch in the United States, possibly the world. Given this status, it should be to no one’s surprise that last week, energy bellwether ExxonMobil announced a $6.6 billion acquisition of Permian assets, their largest deal since the acquisition of XTO Energy in 2010. The company will net approximately 250,000 acres, paying roughly $27,000 per acre. On other metrics, Exxon paid $35,000 for each flowing barrel of oil per day – both attractive valuation multiples compared to other transactions in the oil patch.
In another transaction, Noble Energy agreed to purchase Clayton Williams Energy, another Permian based company, for $3.2 billion. The announced price values the assets at approximately $32,000 per acre, slightly higher than Exxon’s purchase price. It’s hard to believe that five years ago, the average price per acre in the same area was just roughly $4,500 when oil was trading in the range of $80 and $120 per barrel. This goes to show the profitability and efficiency of drilling in the shale patches.
All of these transactions come at an interesting time – most analysts expected distressed companies to sell themselves or their assets around the time oil bottomed at $26 per barrel nearly a year ago and the rig count bottomed last May. However, due to the efficiency of shale production (and cheap credit), the drillers prevailed. With interest rates on the rise and the price of oil somewhat range bound, time will tell which companies continue to survive.

Last Week’s Highlights:

Last week, the Dow Jones Industrial Average fell 0.29%, the S&P 500 fell 0.15% while the Nasdaq slipped 0.34%. After beating the S&P 500 in 2016, the Dow is now barely positive on the year (up 0.33%), the S&P 500 is up 1.45% and the Nasdaq is leading the three major indexes, up 3.2%. Investors were focused on President Trump’s inauguration speech as well as rhetoric surrounding his changes to public policy.
Earnings season continued with most companies in the Financial sector reporting fourth quarter results. So far, 13% of S&P 500 companies have reported and 65% have had positive surprises relative to their earnings estimates.

Looking Ahead:

This week, investors will continue to focus on President Trump and his policy initiatives. Earnings from several Dow Jones components will be released on Tuesday. Dupont, 3M, Johnson & Johnson, Travelers, and Verizon will all report before the opening bell. On Wednesday, AT&T and United Technologies will provide investors with their fourth quarter results. Thursday will give investors further insight into the oil patch as Helmerich & Payne and Baker Hughes both report. On Friday, the markets will be focused on the first read of fourth quarter GDP growth.

What’s On Our Minds:

The investment professionals at Tufton Capital believe that a long-term, buy and hold investment strategy is the to safest, and smartest, way to build wealth in the stock market.  Quite simply, it’s been proven time and time again to return exponential gains on invested capital.

Cultivating Your Portfolio

The term “buy and hold” doesn’t mean investing and forgetting about your portfolio for the next 20 years. There are ways to cultivate and prune your portfolio while still maintaining a long-haul investing strategy. For instance, if a company you invest in changes fundamentally, you may not want to continue owning that security. If the overall market changes dramatically, as it has in the past, you may actually benefit from selling an investment or group of investments. Finally, changing goals as you get closer to retirement may warrant a more conservative portfolio.

Bad Markets

The typical investor is tempted to get out of a bad market by selling when prices are low, which is a poor strategy. The economy fluctuates between good and bad all the time, and those who constantly buy and sell will be hit the hardest in a bad economy. By holding on to your investments, you’ll be better able to ride out a down market, especially if your portfolio is diversified.

Taxes and Fees

Frequent trading results in higher fees, so long haul-investors pay less while fees eat up much of a day trader’s profits. Additionally, short-term gains are taxed at a higher rate than long-term gains. Even if you have the fortune of timing the market successfully, your profits will be diminished by taxes and fees.

Investing for the long-haul is the best investing strategy for the majority of investors because it not only ensures modest gains but is also less likely to yield major losses. A long-haul investment strategy is based on informed, careful decision making and patience.

Last Week’s Highlights:

Investors were focused on the beginning of fourth quarter earnings season and political headlines last week.  Stocks were slightly lower.  After getting close earlier this month, the Dow Jones just can’t seem to crack the 20,000 point threshold.

President-elect Donald Trump held his first press conference in more than five months on Wednesday. Investors were looking for him to cover taxes, fiscal policy, or infrastructure spending but he didn’t elaborate on those topics.

Looking Ahead:

The market was closed on Monday for Martin Luther King Day.

Some important earnings announcements will be coming out this week including CSX on Tuesday, Netflix on Wednesday, and General Electric on Friday.

On Friday, Donald Trump will be sworn in as President. Investors are expecting a shift towards pro-growth policies that should result in better economic and earnings growth.  Trump’s economic plans are broad and he hasn’t gone into specifics but he will likely focus on corporate tax cuts, repatriation of foreign cash, a fiscal push towards infrastructure spending, and perhaps some protectionist tariffs.  We will have to wait and see if Washington can keep the bull market going in 2017.

What’s On Our Minds:

Often, members of Tufton’s Investment Committee are asked why our firm doesn’t use mutual funds in our clients’ accounts.  While mutual funds may offer the benefit of diversification to small investors, our team doesn’t believe they are the best answer for clients with sizable assets. Sure, we could easily free up some time by directing assets to outside managers but we believe that mutual funds have a few key drawbacks.

First, they limit an advisor’s ability to customize a portfolio and manage risk effectively. Second, they add an additional layer of fees, which reduces an investor’s returns. Third, they are inefficient for investors who want to manage their tax bills.

We also believe the limited transparency of mutual funds is problematic. Most investors don’t know what stocks they are holding in the fund, and some funds disclose their holdings only semi-annually. An investor may have 50 stocks or more in a single fund. Imagine tracking your portfolio if you own five or ten stock funds – that can add up to 500 or more stocks in your portfolio.  Why not just buy an index fund for a fraction of the price? Diversification is a good thing, but not so for over-diversification.

Fortunately, our clients enjoy a customized approach to managing their money. We invest in a diversified portfolio of individual stocks and bonds to meet your goals.

If you would like to hear more about our investment philosophy, please feel free to give one our portfolio managers a call.

Last Week’s Highlights:

Stocks increased last week. The S&P 500 was up 1.7% and closed at an all time high on Friday. The Dow Jones also had a good week and came very close to hitting 20,000 for the first time in history.  The December jobs report was solid. It showed the economy added 156,000 jobs and that hourly earnings rose by 2.9% through 2016. These results are in line with the Federal Reserve’s plan to increase rates two or three times in 2017.

The department store sector took it on the chin last week after Kohl’s and Macy’s reported downbeat holiday sales reports.  With the advent of online shopping, brick and mortar stores are struggling.

Looking Ahead:

Analysts are gearing up for 4^th quarter earnings season with Alcoa reporting after the closing bell on Monday.  Delta Airlines reports its results on Thursday before the bell and Friday we will get results from Bank of America, Wells Fargo, and JPMorgan.

As of Monday morning, some merger news has come to light. Japanese drug maker Takeda Pharmaceiticals announced it is purchasing cancer treatment company Ariad for $5.2 billion. Ariad’s shares were up 75% on the news. M&M candy maker, Mars announced it is acquiring veterinary supply company VCA (WOOF) for $7.7 billion.  Mars already has a large pet food business and VCA should help the business with future growth.  On Monday, WOOF was up 27% in pre-market trading.

What’s On Our Minds:

It’s official: the bull market continued in 2016!  While investing with a “rear-view mirror” mindset is rarely a lucrative strategy, with the benefit of hindsight, a quick look back at 2016 helps set the stage for the year ahead.

A main take away from 2016 is that sticking to a disciplined investment process was extremely important.  With a bull market that may have felt a bit long in the tooth, it was crucial to remain invested.  Markets had a horrendous start to the year; stocks fell by 11% between Jan. 1 and Feb. 10^th.  At the time, many thought the U.S. economy may have been headed for a recession.  With all the pessimism, it may have felt like a good time to take money off the table. However, this was a great time to get out your shopping list; stocks were on sale!

In June, the market sold off by 6% when panic was induced following Britain’s Brexit referendum.  Yet again, gloom had taken over on Wall Street. The market didn’t stay down for long though.  Stocks recovered the 6% over the next two weeks. In the rear-view mirror, the Brexit episode was yet another great buying opportunity. Over the summer, things calmed down as investors waited to see how the election would pan out.

Not many were expecting the Trump win in November, and stock market futures were down big overnight on news that he was going to win.  Clearly, the market had priced in a Clinton win.  To the surprise of many, by the time the opening bell rang the next morning, markets actually opened in the green.  It is likely that most investors will remember this surprise election result as the highlight of the year as it showed how uncertainty can effect investor sentiment.  The market continued its “Trump Rally” through the end of the year with hopes that Donald Trump will cut taxes, decrease regulations, and pass some sort of infrastructure spending program.

By the end of the year, the S&P 500 was up 9.54% and the Dow Jones was up 13.42%.  Looking back, it wasn’t a bad year.

Last Week’s Highlights:

It was a quiet week on Wall Street last week as the Trump Rally lost a bit of its steam during the abbreviated week of trading.  The S&P 500 lost just over 1% on light volume.  We hope all of our clients and friends had a wonderful holiday season!

Looking Ahead:

Markets were closed on Monday for the New Year’s holiday.  On Tuesday, Congress heads back to work and the ISM manufacturing index for December will be reported. On Wednesday, Ford Motors reports its sales from December and the Fed will release minutes from its December meeting.  Thursday, we will see earnings results from Walgreens and Monsanto. On Friday, November’s import/export numbers will be released by the Commerce Department.

What’s On Our Minds:

With the end of the year quickly approaching, most folks are enjoying the holidays but some might be a bit worried about their tax situation for 2016.

Taxes are an inevitable part of investing. The tax code complicates investment planning, and the impact of taxes has been steadily increasing as investment planning becomes more individualized.  With careful planning, you can minimize the effect that taxes have on your investments. Your focus should be on the return generated at the end of your investing time horizon—after tax and transaction returns—making taxes an important concern for all investors.

Types of Taxes

A seemingly endless list of potential taxes could affect your investments, portfolio and net worth. Some of the more critical ones are as follows:

• Interest: Interest you earn on investments (typically from bonds and large cash holdings) is subject to tax rates that are the same as your ordinary income tax rate.
• Dividends: You’ll have to pay taxes on dividends that come from stock you own, but dividends are taxed with preferential treatment in comparison to ordinary income and interest income. To receive this treatment, the dividend must meet several requirements to be considered a qualified dividend.
• Capital Gains: When the value of your investments in stocks, bonds and other assets increases from the purchase price and you sell it for a profit, you’ll trigger a capital gains tax. Similar to dividends, long-term capital gains are taxed at lower rates than ordinary income.
• Estate Tax:  For investors with significant holdings, estate taxes can have a substantial effect on the total value they can pass on to heirs or charity. Planning for estate taxes is especially important, and there are many strategies to maximize the value of portfolio holdings.

Tax-advantaged Accounts

• Retirement Accounts: One of the most prominent ways to take advantage of tax-friendly regulations is to create retirement accounts. These accounts include 401(k)s or 403(b)s (depending on type of employer), Individual Retirement Accounts (IRAs) and Keogh plans. All of these accounts qualify for preferential tax treatment and therefore are often referred to as qualified accounts. The benefits of deferring taxes can dramatically compound over time. For example, $1,000 invested in an IRA at a tax-deferred rate of 8 percent grows to $10,063 over 30 years. In a taxable account (assuming 28 percent tax rate), the funds would grow to only $5,366.  Roth and traditional IRAs are both effective ways to save for retirement. With a Roth IRA, you contribute money that has already been taxed in exchange for the ability to make tax-free withdrawals upon retirement. In a traditional IRA, your contributions are pre-tax, but you pay taxes on distributions later on. But how do you choose between the two? Your choice depends on how you think your future tax rate compares to your current tax rate. If you assume your individual tax rate is not going to change between now and retirement, then the net result will be the same regardless of which type of IRA you choose. When looking at changing tax rates, it is most important to focus on both the changing landscape of tax rates as a whole, as well as how changes in your income will affect which tax bracket you fall under. Generally, as people age they earn more money and enter higher tax brackets. In this case, and assuming no change in the overall level of taxes, it would be more beneficial to pay the taxes now, at a lower rate. However, if you believe that your tax rate will decrease, then traditional IRAs will be more beneficial.

Tax-advantaged Investments

• Municipal Bonds: In addition to tax-advantaged accounts, you can also choose tax friendly investments. For instance, municipal bonds are an ideal way to invest in fixed income while limiting the effect of taxes. Municipal bonds are any bonds issued by a U.S. city or other local government. The interest received by bondholders is generally exempt from the federal income tax and from income tax in the state in which they are issued. On the other hand, municipal bonds are usually priced higher to account for these tax effects. However, the tax exemption on interest income will be more beneficial for individuals with significant income. Therefore, investing in municipal bonds may minimize the tax effect on investments for individuals in higher tax brackets.

In addition to taxes, you should also be aware of the effects of transaction costs and fees on your investments’ growth. Tax-advantaged accounts help to alleviate these costs as well, making them practical for investors who want to save for retirement or education expenses. The uncertain outlook for taxes as they relate to investment planning makes it critical to stay up to date with new developments, and discuss strategies to minimize your tax burden with your financial and tax advisor.

Last Week’s Highlights:

The Federal Reserve increased interest rates last week by 25 basis points, to between 0.5% and 0.75%. Fed Chair Janet Yellen stated, “considerable progress the economy has made” when explaining the rationale behind the decision.  For the most part, investors had expected this decision.

Oil prices increased last week as OPEC members, including Russia, agreed to cut output by 558,000 barrels a day. Oil prices increased to 51.90 dollars per barrel which is the highest it has traded in the last 17 months.

Donald Trump announced some important appointments last week. He tapped Exxon CEO, Rex Tillerson to be Secretary of State Rick Perry as energy secretary, and Goldman Sachs’ Gary Cohn as chief economic adviser.

Looking Ahead:

There are a few important economic reports in the coming this weeks.  The Purchasing Managers’ Index (PMI), which is an indicator of the economic health of the manufacturing sector, will be released on Monday.  Also on Monday, Janet Yellen will deliver a speech on the state of the job market and the electoral college will officially cast their votes for president.  Existing home sales will be released on Wednesday, durable goods and personal income and spending on Thursday.  On Friday, consumer sentiment and new homes sales numbers will be released.

What’s On Our Minds:

With the end of the year quickly approaching, it’s time to look back at what’s happened and how it will affect your financial future.  Go through these important items so that you can go into the new year with financial peace of mind.

INVESTMENTS

• Consider tax-loss harvesting to lower taxes on capital gains.

By selling positions that are down this year, you can use the losses to reduce up to $3,000 of taxable income. If your total losses surpass $3,000, you can roll over excess losses to offset gains in another year. If you have losses from a previous year, calculate how they affect your gains or losses from this year.

• Check your performance.

Are your investments on track to meet your goals? If your portfolio is lagging behind the appropriate benchmarks, it may be time to reconsider your investments.

INCOME TAX

• Review your tax withholdings.

Have you had a major life change (employment change, marriage/divorce, a new child) that affects your income tax? Check to make sure your tax withholdings have been properly adjusted. Having low withholdings can lead to tax penalties, while having too high of withholdings prevents you from accessing your money until your tax return is filed.

• Estimate your AGI.

Determine your adjusted gross income (AGI) with the help of your tax advisor. Your AGI will help determine your tax bracket, which you’ll need for investment and retirement planning.

• Estimate your AMT.

Determine whether you will be subject to the Alternative Minimum Tax (AMT) and if there are ways to mitigate your AMT liability.

GIVING

• Reduce your estate through gifts.

You are permitted to give up to $14,000 ($28,000 for married couples) a year per recipient as an untaxed gift. Gifts above this value will consume part of your lifetime/estate tax exemption amount, $5.45 million in 2016.

• Donate to charity as a way to reduce taxes.

You can lower taxable income by 50 or 30 percent with a gift to a public charity or by 30 or 20 percent with a gift to a private foundation. If your gifts exceeds these limits, you can roll over the excess deduction for up to 5 years.

RETIREMENT ACCOUNTS

• If you are retired, make sure you’ve taken all necessary required minimum distributions (RMDs). 

RMDs may be one of the most important items to review when going over your finances at the end of the year. Standard IRAs require these distributions be taken annually after the year you turn 70 ½; standard 401(k)s require them annually after you retire or turn 70 ½ (whichever is earlier). Failure to take an RMD will trigger a 50 percent excise tax on the value of the RMD.

• Max out contributions to an IRA and employer retirement plan for the year. 

Both IRAs and 401(k)s have annual contribution limits. If you find you have excess savings and have not reached your annual limit, it may be a good idea to make additional contributions. Similarly, you may also consider making greater monthly contributions to your accounts next year, spreading out the cost of contribution. The deadline for IRA contributions is usually April 15 of the following year; 401(k) deadlines may be restricted to the calendar year, depending on your employer. If your children or grandchildren make less than $132,000 per year, consider gifting them $5,500 so they can make a Roth IRA contribution.

• Consider converting a traditional IRA to a Roth IRA.

Did you have a good tax year? It may be an opportune time to convert a portion (or all) of your traditional IRA to a Roth IRA and pay your taxes at a lower rate. It is important to understand, however, that Roth accounts have contribution limits placed on them, so keeping a traditional IRA might be beneficial. Before making any changes, consider seeking the help of a professional accountant who can help you with the conversion and calculate your new tax liability.

Last Week’s Highlights:

Markets continued their rally last week as indices continued to break records.  The rally was broad; no sectors booked a loss last week.  Among industries, chipmakers and banks had a particularly strong week as they outperformed the market.  Since the election, investors have been favoring financial companies on the assumption that Trump’s administration will work to create a much more lenient regulatory environment.  In general, a brighter economic outlook is favoring stocks.

The selloff in the bond market continued last week which is translating into higher rates and lower prices across the board.

Looking Ahead:

All eyes will be on the Federal Reserve this week as investors are expecting them to raise short-term interest rates on Wednesday.  Janet Yellen will also talk about the Fed’s plans for 2017 during her press conference. Also on Wednesday, November retail sales and industrial production figures will be released.  On Thursday, we will also get weekly jobless claim number.

Companies are releasing earning this week as well. On Wednesday, Pier 1 Imports releases their results and on Thursday Oracle released their numbers.

What’s On Our Minds:

Last week, we saw some good employment numbers as the Bureau of Labor Statistics (BLS) reported 178,000 new jobs in November and a jobless rate that ticked down to 4.6%. This has been the longest continuous streak of job growth on record. The economy has added almost 16 million jobs since 2010. All good news, right?

Hopefully, yes. But a tiny detail from the White House’s statement reminds us that all good things do come to an end. In the statement, the White House boasts that this is the lowest unemployment since August 2007, but we remember that was two months before the S&P 500 reached its peak before the financial crisis. Now, of course, we can’t point to one metric and forecast a recession, but we returned to one of our favorite charts that we put together using the St. Louis Fed’s excellent online tool.

We plotted three data series. Each series we scaled down to be represented on the same axis:

1. Initial claims for jobless benefits as a percentage of the civilian labor force (blue). Taking this commonly viewed number as a percentage of the labor force adjusts for the fact that we have seen an increase in the US population over time.
2. The civilian labor force (red),which includes all employable persons, not just those employed, which has steadily risen over time, albeit more slowly in recent years.
3. The Labor Force Participation Rate, or the percentage of employable people who either have work or are seeking work.

The level of initial claims is at the lowest it’s been since records are available. We also see that the labor force participation rate, green, has been declining in recent years. The factors causing this are likely varied, and a combination of automation and workforce changes which lead to discouraged workers, or those who have removed themselves from the workforce. This is a sort of “shadow unemployment,” meaning that these people might want more work, but have given up their search. There are also those who would like full-time positions but who have only been able to find part-time work. To account for these underemployed people, the BLS provides several employment measures that add back discouraged and otherwise marginally attached workers:

This graph looks significantly different from the previous graph, in that the current employment situation does not appear from these data to be as overheated.

We continue to monitor both of these graphs. We also keep in mind that the character of the American workplace has changed dramatically, where the Internet has enabled companies to produce much more output with drastically fewer employees. It is possible that there is a new, higher equilibrium unemployment rate, or a “natural rate of unemployment”. Determining that exact (and unobservable) number will prove to be difficult even for the crack economic team at Tufton Capital.

Last Week’s Highlights:

Stocks were mixed last week as investors sold technology stocks, bought financial services stocks, and the energy sector rallied on news that OPEC agreed to cut production levels.  Overall, the Dow Jones was flat, the S&P 500 fell a bit, and the NASDAQ was down over 2.5%.

We had a strong jobs report last week and we are nearing full employment levels.  The jobless rate fell to 4.6%, leading many to believe that the fed will raise interest rates later this month.

In politics, President-elect Donald Trump made a few important appointments last week. He chose former Goldman Sachs banker Steven Mnuchin as Treasury Secretary and billionaire Wilbur Ross as Commerce secretary.  These appointments had financial stocks on the move higher as many believe these two will decrease regulations on the industry.  Over the weekend, Trump tweeted warnings to companies planning on outsourcing business abroad saying they should be prepared to face “retribution”.  On the other side of aisle, house Democrats re-elected Nancy Pelosi as their leader.

Looking Ahead:

News out of Italy could have international investors on high alert this week. Early on Monday, Prime Minister Matteo Renzi said that he would resign following defeat in a referendum on constitutional reform.  That being said, polls had predicted a “no” on the referendum so the fallout should be muted.

On Monday, the ISM nonmanufacturing index for November is reported.  On Tuesday, Bob Evans, Michaels and Toll Brother report their quarterly results. On Wednesday, H&R Block, lululemon, and Vera Bradley report their earnings.  On Thursday, Broadcom, Liberty Tax, and Ceina report earnings and Baker Hugh should discus merger plans with GE’s energy division during their investor meeting.

What’s On Our Minds:

This week, investors’ eyes will be on OPEC and their meeting in Vienna, Austria. The members of the Organization of Petroleum Exporting Countries (OPEC) will come together on Wednesday to decide on whether or not to cut oil production in their respected countries. Saudi Arabia, the world’s largest oil producer with production of approximately 10.5 million barrels per day, has allegedly proposed that they will cut 4.5% of their production if Iran freezes their own production at roughly 3.8 million barrels per day. In addition, the Saudis also desire additional outside countries, such as Russia, to agree to freeze as well. Production levels would be verified by a third party to avoid any kind of cheating.

OPEC is in quite a situation as Saudi Arabia is no longer the world’s swing producer. US shale producers can react to increases in the price of oil in a matter of days to weeks. Christof Ruhl, Head of Global Research at the Abu Dhabi Investment Authority, presented the chart diagram below nearly two years ago before the November OPEC meeting and the argument still holds true today. In the current situation, with lower oil prices, OPEC countries obviously have lower oil sales than they did when oil was at $100 per barrel. If they cut production, propping up the price of oil, US shale producers will ramp up production and take market share from OPEC. As OPEC loses market share, sales will again be lower.

Could this be the end of the traditional OPEC as we know it? Only time will tell.

Source: Christof Ruhl – Abu Dhabi Investment Authority

Last Week’s Highlights:

For the third week in a row, stocks were up on continued reflationary hopes following the US presidential election.  On Tuesday, for the first time since 1999, the Dow Jones, the S&P 500, the Nasdaq, and the Russell 2000 all set record highs. Domestic small-caps had a particularly good week as investors believe these companies will benefit from accelerated growth and tax reform.

Existing home sales were reported at 5.6 million. Durable goods sales were up 4.8% month over month. Jobless claims were reported and are down to 251,000.

American shoppers unofficially kicked off holiday shopping season on Friday. As has been the trend in recent years, brick and mortar store sales are shrinking and online sales are growing. On Thursday and Friday, online sales surpassed $5 billion with more than $1.2 billion coming from mobile devices.

Looking Ahead:

Thanksgiving is now behind us and Americans are back to work after a holiday packed full of turkey and rivalry football  games.  Online holiday sales will continue on “Cyber Monday”.  On Tuesday, Third Quarter US GDP will be released and Chicago O’Hare airport workers are set to go on strike.  OPEC is having a meeting on Wednesday where they will try to agree on a production cut. On Thursday, we will get automotive sales figures from November. Friday is a big day as November’s jobs report will be released.

What’s On Our Minds:

Our focus in recent weeks has been on the election and while we like to keep our topics fresh from week to week, it would be remiss for us to ignore the effect that the election’s results are having on financial markets.

While campaign promises don’t always come to complete fruition, based on recent market movements, it’s clear that investors are expecting a lot out of Trump.  Specifically, his plans to rebuild the country’s infrastructure through a stimulus package, cut taxes on corporations and individuals, and increase trade barriers are being seen has major policies that could improve our domestic economy and thus, move the market.  While these plans have been good news for equity markets, it has triggered a selloff in the fixed income market.

Global bond yields, which rise as bond prices fall, have been falling since the Brexit in June, but the selloff has accelerated since Trump’s upset victory.  The rationale behind the continued sell off is that Trump’s policies will provide a boost to inflation, which is the enemy of long-term bonds, because it erodes the value of interest payments.  Furthermore, bonds just seem less attractive compared to stocks when hopes of economic growth is on the horizon.

All of this action in the market is exciting, but we continue to remind our clients and friends of the importance of sticking to a long term investment plan.  Instead of speculating how new policies may affect the investment landscape, we believe it is best to focus on underlying fundamentals and make investments accordingly.  With the benefit of hindsight, recent market moves can be viewed as an example of how tough it is to predict short-term market moves.  Media pundits had many convinced that a Trump victory would be calamitous for the markets, but we’ve seen numerous record highs since his election.  As is usually the case, we believe that calm heads prevail over the long-term.

10 Year Treasury Since 6/1/2016    

Last Week’s Highlights:

It was another busy week on Wall Street. The Dow Jones finished the week marginally higher last week after reaching numerous record highs. The S&P 500 had a better week and was up 80 basis points due to its lower exposure to industrial and financial services sectors.  With only a few weeks left in the year, both indexes are up by more than 6% year to date.

Janet Yellen delivered remarks to the Joint Economic Committee of the US Congress on Thursday. She stated that the economy is making good headway and that a hike in interest rates could be coming “relatively soon”.  Markets are currently pricing in a 25 basis point hike for the next FOMC meeting in December.

Retail sales numbers came in strong last week. Merchants in the U.S. reported increased retail sales in October by 0.8%.  These numbers should bolster the Fed’s pending decision to increase rates next month.

Looking Ahead:

Higher yields and a strong dollar should continue to dominate financial headlines this week.

On Tuesday, Barnes & Noble, Campbell Soups, Chico’s FAS, GameStop, Dollar Tree, and Hewlett Packard Enterprises report their quarterly results.

Some important economic data comes across the wire this week. U.S. existing home sales are released on Tuesday and Global Flash Purchasing Managers’ indices will be released on Wednesday.

It will be a short week for investors as domestic markets will be closed on Thursday for Thanksgiving and the stock market closes at 1 PM on Friday.