Spring 2017 Letter

Brent Carlson |

“In winter, I plot and plan. In spring, I move.” – Henry Rollins

Spring is in the air! I don’t know about you, but I’m ready for the new season to come. Days are getting longer and the cold isn’t as bitter or enduring as it used to be. However, we all know Minnesota will allow for more cold and perhaps even a little more snow as winter draws its last breath. 2017 is shaping up to be an interesting year with promises of change to healthcare as well as an overhaul of our tax code. Toss in an unpredictable North Korean situation and we find both domestic and international fireworks could be in store. Only time will tell what transpires, but rest assured we will be closely watching events as they unfold looking for clues and opportunities that affect your portfolios. With the return of warmer weather and the end of tax season, I’m feeling full of energy, ready to take on new business, new projects, and new challenges. Spring is the season where the world renews itself. It’s a season for growth and a season for cleaning. Really, it’s the season to get things done. That’s why I wanted to write you a quick note to say that if there’s anything you want to focus on financially, or any new goals you want to set or need help on, please give me a call. I’m currently conducting reviews and planning sessions with many of my clients, so if you’d like to meet, just give me a call. We can plan in advance your tax situation for next year, do a little spring cleaning on your finances, or review your investment strategy in light of the latest market news. If it has been awhile since you reviewed your life insurance needs or done a review on existing policies, we would be happy to assist you in this area as well.

As we approach the end of the 1st quarter for year 2017, we see that the S&P 500 has taken a breather after a strong post-election run. However, the majority of the indicators I watch remain on offense and most of our stocks have been participating to the upside to some extent. I must note, not all stocks have risen with the market, meaning there are some stocks that have not been able to keep pace during this recent stretch of the rally. For example, over the past 180 days, the S&P 500 Equal Weighted Index SPXEWI is up 10.83%, yet only 135 stocks within the S&P 500 are outperforming that number (Dorsey Wright). It is the other 365 stocks that create a drag on the portfolio, and in essence, can be holding back the “team”. For this reason, we want to consider paring these stocks in order to free up capital and potentially put it towards a more productive use.

Over the past couple of weeks we have generally seen U.S. Equities continue to pullback and consolidate at current levels. While many of the broader market indices, like the S&P 500 Index SPX and the Dow Jones Industrial Average DJIA, have fallen over the past two weeks, their long-term picture still looks positive. Longer-term indicators, such as the Positive Trend Index, show that the general health of the market is still strong. Below you can see the current ranking of the 6 broad asset classes showing the continued strength of the equity market.

While the bull market in U.S. equities is capturing plenty of headlines, perhaps less well understood is the strength taking place in International equities. Last week, International Equities gained 10 buy signals and is closing the gap with Domestic Equities (the top asset class). While Domestic Equities are the strongest class on a relative strength basis, International Equities are the most improved asset class so far this year. For those of you with 401K’s, now is a good time to check and make sure that you have international exposure in your portfolio. We are more than happy to review your 401K and help you reallocate your funds. Please don’t hesitate to contact us for a review.

The Trump administration, unlike other administrations, has openly said they want to weaken the dollar against the currencies of other trading partners in Europe, China, and Japan. The logic is by making the US Dollar weaker, American exports will be more competitive. The first 100 days of Trump’s agenda have seen more inaction than many pundits and analysts have predicted. Trump's failure to rally enough support from his own Republican party - which controls both houses of U.S. Congress - to repeal and replace Obamacare spurred a rush to safe haven assets such as gold. The Dow slumped more than 125 points Monday morning (3/28) as Trump's stunning failure to repeal and replace Obamacare spooked investors. Between March 15 and March 27, the Dow saw 8 consecutive down days. That hasn't happened since 2011, although this decline was much more modest. The market retreat is a reflection of rising fears on Wall Street that Trump's bold promises of sweeping tax reform, regulatory relief and infrastructure spending is in doubt. Investors have begun to contemplate that the Trump agenda will be delayed, watered down or even derailed.

The chart below is the US Dollar, as you can see we have now entered a downward column of O’s and are close to breaking below the bullish support line. The decline in the dollar has also coincided with strength in the commodities market. Gold had already rallied sharply from its March 15 low after a less hawkish policy statement than expected from the Federal Reserve, which dampened expectations for near-term increases in US interest rates. Gold is highly sensitive to rising US rates, which increase the opportunity cost of holding non-yielding bullion. Gold has run into resistance and is now at $1,255 an ounce. YTD the yellow metal is up 8.55% while the broad based gold mining ETF GDX is up 8.53% (CNBC). At CAM we still believe that with the potential of outsized gains going forward that select precious metal mining stocks could reward us again this year as they did last year with an extra edge in overall portfolio performance.

Credit: Dorsey Wright & Associates

Securities offered through WFG Investments, Inc. member FINRA & SIPC. Investment advisory services offered through WFG Advisors, LP. The information set forth herein has been obtained from sources deemed reliable; we do not guarantee its accuracy, completeness, or fairness. We have relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources. You should discuss any legal, tax or financial matters with the appropriate professional. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. The opinions and ideas of this piece are those of Carlson Asset Management and do not necessarily represent the opinions of WFG Investments, Inc. or any of its affiliates. The statements made regarding future prospects may not be realized. Past performance is not an indicator of future results.

As you can see from the right chart above, the 10 Year Treasury (TNX) jumped from 1.8% to 2.6% right after the election. While the move was surprising, especially given how sharp and sudden it was. Things have cooled down and the TNX has retreated from a high of 2.62% to 2.37%, signaling that rates may not go as high as people think. With this latest retreat in yield we are finding that many of our Utilities and other higher dividend paying stocks are moving back in favor. On March 16, the Federal Reserve Raised the Federal Funds Rate 25 basis points from .75% to 1% and has indicated the possibility of up to 3 more rates in the coming year. Increases in the interest rate could put upward pressure on the dollar. However, with other foreign central banks holding their rates near zero, it might be tough for the Fed to continue to raise rates. With many analysts having called for higher rates in the past year the surprise of 2017 could very well be sustained low interest rates which are good for borrowers, home buyers, and dividend paying stocks.

One more thing, I’m currently looking for a select number of new clients—people who can really use my services. So if you have any friends or family members who don’t have a financial advisor, or who just want a second opinion on their investments, please let me know. I’ll make sure they get the help they need. When meeting with a referral, sometimes we end up doing business together. Other times, I’ll just answer a few questions, send some information, and that will be the end of it. The outcome is less important to me than the opportunity to be of service. It’s why I got into this business in the first place. Meeting new people and helping them with their financial needs is what I do—and like doing—best. Working with people like you is what makes my job rewarding, so let me know if there’s ever anything I can do for you!