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Q4 2016 Commentary Thumbnail

Q4 2016 Commentary

The Year of the Anti-Establishment Revolt

From Brexit in July to the election of Donald Trump in November to Italy’s ”no” vote in December against the reforms proposed by Prime Minister Renzi and his subsequent resignation, a populist anti-establishment wave swept the globe. The seeds of this revolt have been building for years and 2016 was the year those seeds sprouted in earnest. There are likely several causes of this push-back against establishment elites. One dates back to the Great Financial Crisis (GFC) of 2008. After having been bailed out by taxpayers in 2008/2009, many financial institutions and their executives didn’t pay a steep enough price for their misdeeds in the eyes of the public. Instead, within a few years of the crisis, these same executives were once again enjoying large salaries and bonuses as though nothing ever happened. All the while the average citizen experienced no growth in their real income since the GFC. To add fuel to the fire, the central banks of the world injected trillions of currency into the financial system which had the intended effect of raising asset prices (stocks, bonds, real estate, fine art, trophy properties in NYC, London, etc.). This had the unintended consequence of making those with the largest share of such assets (i.e the 1%) richer, while having very little effect on the average citizen. This growing wealth inequality finally began to boil over in 2016. One of the reasons Donald Trump won the presidential election in the U.S. was due to the large turnout and backing he received from the white working class. While many of these voters have traditionally voted Democrat, after years of feeling left behind they voted for change. In July British voters also voted for change by choosing to leave the European Union (EU) in a revolt against the immigration policies and regulatory burdens many perceived were being forced upon them by unelected bureaucrats in Brussels. In Italy, voters overwhelmingly voted against further reforms that were desired by their Prime Minister and the EU. In essence, the Italian vote was a vote against further subservience by Italians to the directives of the EU.

These events share more in common than just a populist backlash. First, almost all of the pundits and pollsters were very confident Britain would not leave the EU and Hillary Clinton would be the next president of the United States.  Second, the reason the experts were incorrect in forecasting the ultimate outcome of these elections was the same. They failed to understand the level of discontent amongst the “unprotected class” as written about by Peggy Noonan of the Wall Street Journal.  Essentially, establishment elites enjoy the privilege of passing laws and regulations that they themselves are largely immune from given their societal status of power and wealth. Finally, most economists and financial market pundits predicted doom if Brexit happened, Trump was elected and Italy voted no to reforms. While the financial markets did fall in the week following Brexit and in the overnight hours after it became apparent Donald Trump was elected President, they quickly recovered all of those losses and continued to move higher thereafter. And the Italian vote? It didn’t even register in the financial markets. 

The bulk of U.S. stock market gains occurred in the last six weeks of the year after the presidential election, as market participants began to anticipate lower corporate and individual taxes, less regulation and increased fiscal spending. While some are asking if this is another Reagan revolution, the starting point from a financial market perspective couldn’t be more different. See my blog post entitled “The Impact Of A Trump Presidency on Financial Markets” on our website pyawaltman.com. Bond prices, however, moved in the opposite direction of stocks post-election, falling in price as interest rates rose on rising inflation expectations. So where does that leave us as we begin 2017?



We are not ones to make “predictions” as to what 2017 will hold for the financial markets. That’s a fool’s errand that we will leave to others. But we can know approximately where we are in the cycle and how assets are priced. We are in a unique period where both stocks and bonds are richly valued relative to historical valuation metrics. But bull markets don’t typically die from overvaluation. Rather some exogenous shock normally occurs to force investors to re-evaluate the risk premium they are willing to pay to own such assets. The current economic expansion, albeit the weakest on record since WWII, is getting long in the tooth by historical standards. If history is any guide, the probability (not certainty) of a recession in the next four years is quite high. Having said that, we do feel with the Republicans in control of both the Presidency and Congress that significant change is upon us that will likely impact financial markets. Lower taxation and regulation with increased government spending, if these things do actually occur, should increase short-term economic growth holding all other things constant. In such a world, bond prices may continue their gradual decline as interest rates nudge higher. But as we all know, things don’t hold constant. If China is unsuccessful in containing its own brewing credit crisis and capital flight out of the country, a more significant devaluation of the Chinese Yuan may be necessary. If this were to occur, a deflationary shock wave emanating from China would hit the rest of the world, likely resulting in lower interest rates in the U.S.

In a world with so many crosscurrents, we choose to remain focused on what we can control. Namely, constructing diversified portfolios that can withstand a myriad of market environments. This means not only owning superior quality businesses, but also traditional fixed income with shorter durations, higher income producing securities that benefit from a rising interest rate environment, real estate investments, and a small allocation to precious metals as a portfolio hedge given their low correlation to other financial assets.

As always, we remain committed to helping you achieve your financial objectives.

We wish you and yours a Happy New Year and a healthy and prosperous 2017!

Financial Planning Focus

As is customary in the 4th quarter of every year, the IRS announced new limits for 2017 with regard to savings, estate tax exemptions and gifting limits.  Below are a handful of those updates that you may find pertinent to your situation, along with adjustments relating to Social Security.

  • The annual gift tax exclusion amount, yet again, remains unchanged at $14,000 per recipient ($28,000 per recipient if married couple is gifting).
  • The federal estate tax exemption is $5.49 million, up from $5.45 million.
  • The defined contribution plan [401(k), etc.] savings limit remains unchanged at $18,000 ($24,000 if over age 50)
  • IRA – traditional and Roth—contribution limits remain unchanged at $5,500 ($6,500 if over age 50). The last increase was in 2013.
  • Social Security benefit income will increase by 0.3% for recipients in 2017 over 2016.
  • The Social Security wage base will increase to $127,200 from $118,500 for 2017. This is the amount up to which wages are subject to Social Security payroll taxes of 6.2%. This means high- wage earners will see an increase of $539 in their payroll taxes for 2017.

Please remember that you can contribute to your IRAs (traditional and Roth) for the 2016 tax year until the tax deadline of April 18, 2017*.  2017 is a unique year, as the tax deadline is pushed to Tuesday the 18th of April. This is a result of the 15th falling on a Saturday and Monday the 17th serving as the District of Columbia Emancipation Day holiday.

If you would like to learn more about our financial planning services, please visit our Financial Planning page or contact Melissa Ballard at 865.693.6301 or mballard@pyawaltman.com.

*Note that depending on your income, Roth IRA contributions may be capped and traditional IRA contributions may lose their tax deductibility.  Contact your tax professional for details on your individual situation.

The information contained in this commentary has been provided by PYA Waltman Capital, LLC for general information purposes only and has been obtained from sources believed to be reliable, but is not guaranteed. The information shall not constitute investment advice or an offer or recommendation to buy or sell any security, commodity or services. The products and services described in this commentary may not be available to, or suitable for, all investors.Past performance does not guarantee future results. Market conditions can vary widely over time and can result in a loss of portfolio value.