2016 Economic Update – Politics and the Economy

Happy Spring…or sort of since after an unseasonably mild winter, we finally have snow in New York. At least it will be brief, though! Mild is not the word that would describe the markets so far this year, as it felt more like a rollercoaster. After 2016 kicked off with the worst 10-day start for a year on record and losses exceeding 10% as of mid-February, there was a great shift in the markets. After the negativity and volatility that began the year, the S&P 500 closed up 1.4% and 61% of stocks in the S&P 1500, which includes large, mid and small cap companies, were up for the quarter. Although this seems like a minor gain, it is amazing that the S&P 500 was not only able to erase these huge losses but to end the quarter with a gain at all. This chart shows just how volatile this crazy quarter was.

1st quarter 2016 S&P 500

 

 

 

 

 

 

 

 

 

Source: BeSpoke 3.28.16 Chart of the Day

Despite negative news from abroad, the US economy continues to remain stable, strengthened by sectors of the economy that are powered by consumer spending, such as retail, housing and autos. US employers continue to add jobs, the employment rate is currently at 5% , there is wage growth and oil is beginning to stabilize. These are all good signs of a vibrant economy. In fact, the US seems to be the strongest, most stable economy in the world right now.

The Fed plans to proceed cautiously on raising rates due to “ongoing risks” from China and other global concerns. The major threats now come from “non-states”, such as ISIS and other terrorist groups, as we as a global society must learn to live with this and collectively contain this risk. According to Mohammed El-Erian, Chief Economic Advisor at Allianz, there is very little chance of a US recession this year and only a 30% chance for 2017. What could lead to this are Fed policy mistakes, market accidents and a world recession.

Politics took center stage this quarter, not only due to the upcoming Presidential election, but because two progressive states signed minimum wage increases into law. California and New York swiftly, as if in competition, adopted plans to reach a statewide wage floor of $15 per hour. To put this in perspective, the federal minimum wage is $7.25 per hour. The intent of this wage increase is to promote economic fairness; however, businesses and opponents have warned of the negative impact this will have on corporate profits and the resulting higher costs for consumers. The true effects of this legislation remain to be seen.

As for the Presidential election, this primary is certainly the strangest I have ever followed. A contested Republican convention in July is more of a reality than ever before. The last time this happened was in 1952. Each candidate needs 1,237 delegates to win the Republican nomination. The frontrunners, Ted Cruz and Donald Trump, need 88% and 55%,  respectively, of the remaining delegates. If that sounds like a lot, it is. This process is certain to at least go through June 7, when 303 delegates of the 800 delegates remaining to be determined will be on the ballot.

If there is a not a clear winner based on primary results, the winner will be decided at the Republican convention. Although a large percentage of the American people support Trump, the actual delegates do not seem to. Of the 168 National Republican Committee members, each of whom doubles as a convention delegate, only 1 publicly supports Trump. Most states bind their delegates to candidates based on the primary results. At the convention, delegates are released in stages and can then shift their support. There are 3 ballots at the convention and more delegates are released after each round. If Trump does not win on the first round, his odds do not look favorable.

And just as interesting as the Republican nomination process is the Democratic nomination process. It seemed that early on, the Democratic party piled all of its eggs in Hillary Clinton’s Easter basket, but along came Bernie Sanders. Sanders may have been an unlikely contestant but he has gained support, even among young women voters. Clinton is under threat of being indicted as the FBI investigation into that whole mess involving her emails enters its final stages. Although she has been dismissive about the matter, there is concern among top ranking Democrats in Washington regarding her inability to move forward as the nominee if she is indicted.

So right now, for both parties, it seems to be anyone’s game! I hope you enjoyed all of this political commentary, which is just fascinating and certainly not a representation of my political views. The end result will have an effect on the economy and therefore, very important and worthy of following closely.

Please find enclosed your 1st quarterly report for 2016. If you have any questions or concerns, please contact me.

Warm regards,

Olivia A. Mussett, CFP®