The Markets

The surging equity market that had been riding a wave of investor enthusiasm following Donald Trump’s election as US president abated somewhat towards the end of the first quarter. Stocks rose based on the expectation that Trump’s electoral victory would usher in a Reagan-like era of rampant deregulation, fiscal stimulus in the form of infrastructure spending and that he would create an opportunity to radically revamp the US corporate and personal tax code. These assumptions have become more muted following the new Administration’s failed attempt to push health care legislation through Congress.

Nonetheless, the Standard & Poor’s 500 posted its biggest quarterly gain in two years and a more optimistic outlook for economic stable growth has taken hold in the US. The index of the nation’s 500 largest companies rose 5.5% during the first three months of this year, mostly due to outsized gains in the technology sector which jumped 12%. The NASDAQ composite index of the one hundred largest technology companies was boosted by investor Warren Buffett’s purchase of Apple shares and continued investor enthusiasm for mega sized firms like Amazon and Google. Apple jumped 24% in the first quarter. It alone was responsible for 15% of the entire S&P 500’s first quarter gain.

The Dow Jones Industrial Average, comprised of mostly non-tech companies, rose 4.6% while the Dow Jones Transportation Average made up of companies such as railroads and airplanes was flat for the first quarter. Midsize US companies rose 3.6% while small-cap companies, those that are more entrepreneurial and the major generators of new jobs, rose only 0.7%. The best sector of the stock market was biotechnology which rose 16%. The worst performing section was oil service companies which declined 8%.

Overseas, stock markets turned in a strong performance during the first 90 day period of the year, up 7.4%. Spain and Chile lead the pack while India, whose Prime Minister upended that country’s traditionally cash based economy by outlawing the use of most paper currency, saw its stock market rise 11%. His political party gained in regional elections and so it looks like India may be over the worst of its transition to an electronic currency environment. Japan’s stock market fell 1.1% as Prime Minister Abe’s program of monetary and fiscal stimulus has burned itself out. Korea, rocked by political turmoil, saw its stock market rise 6.6% as business people there seem undeterred by continued uncertainty regarding the fate of the country’s leading politicians and heads of its major conglomerates. The UK moved ahead with its plan to separate from the European Union and as a result, several large financial firms have announced plans to move their headquarters to Brussels from London. England’s stock market rose 2.5% during the first three months of 2017.

Gold rose 8.46% while crude oil has fallen almost 6% so far this year. Natural gas has taken an even bigger hit, down 14.3% even though President Trump has been rolling back previous enacted regulations on natural gas drilling and transportation. Commodities in general have been relatively flat so far this year as has inflation. Even though the political scene is tumultuous in Europe, Korea, Japan and the US, most stock markets have been relatively calm and there has been little volatility so far this year.

In the bond market, the Fed has raised interest rates twice now with little effect on investor expectations for the future. The overall US bond market has been flat, up 0.7% with US corporate’s return of 1.1% inching out government bonds rise of 0.7%. High-yield or junk bonds did the best, up 2.4%. Municipal bonds produced a respectable return of 1.5% for the quarter.

Investors and financial institutions continue to have a large appetite for long-term, low yielding government bonds. This is due in part to regulatory changes that require institutions to have a very conservative investment strategy so no matter how low interest rates are, US government bonds are still paying more than their peers in Japan and Europe. One not so positive implication of continued low interest rates is that expectations for future economic growth in Europe and the US remain muted. Governments in Europe have been issuing one hundred (100) year bonds paying between 1% and 2%. Can you imagine?

Corporate and individual borrowers of money have seen their interest rates rise alongside of the Fed hikes. The new prime rate in the US is 4%, as opposed to Canada’s 2.5% and Japan’s ultra-low 0.5% rate. Long term mortgages are now around 4.15% while returns available to investors in Certificates of Deposit remain mired at the 1.5% level.

Another sign of the relative market calm is that stock market’s ups and downs, known as” volatility”, is at its second lowest level on record. Investors thought that President Trump would help financial institutions and infrastructure building companies thrive but now that his political efficacy is perceived as being marginal, those sectors have dropped back. The question remains open as to whether or not the rest of the market will follow.

The Economy

The US economy continued to show signs of strength during the first quarter of the year. Personal consumption, inflation and economic growth have been slightly stronger than expected. There is optimism among business owners and investors that some kind of tax code reform will be forthcoming and consumers appear to feel better about the economy than they have in the past 17 years. CEOs of the Standard & Poor’s 500 companies say they are more optimistic now than at any point in the past decade but that doesn’t mean everything is looking up in real economic production terms. The US economy grew 2.1% last year and is now in the seventh year of the longest and weakest post World War II era expansion.

There is a large gap between business sentiment and actual reality, especially on the employment front. Most government reports and published experts’ opinions state that the US labor markets are extremely positive. Bloomberg News reports that the jobless numbers aren’t just good, they are great and Ben Bernanke, former chairman of the Federal Reserve Board, believes that the US economy is approaching full employment as does Janet Yellin, the current chairman. Economists such as Martin Feldstein, former chairperson of the President’s Council of Economic Advisers believes that the American economy is in good shape and that hourly earnings and wages are due to rise soon.

These assessments draw on traditional reports about new hires, state unemployment filings, and job listings on various websites and agencies. What they are missing is the fall in the labor force participation rate, which is the number of able-bodied workers who are no longer actively looking for work or who have dropped out. Between 1948 and 2015, the work participation rate for US men over the age of 20 fell from 86% to 68%. This means that the percent of men without paid work more than doubled from 14% to 32%. Reports of nearly full employment levels are grossly misleading the markets.

It’s well known that women entered the workforce en mass over the last 50 years, nearly doubling their labor participation from 34% to 70%. What’s less well appreciated is that since the late 1990s, female participation in the workforce has begun to decline. Americans put in many more work hours than their peers in other countries, 100 hours more per year when compared to Canadians and Brits and 300 hours more (or eight full workweeks) than people in France and Germany.

The economic issues that Donald Trump promised to fix in his election campaign are manifested most acutely in the white male workforce. There are 10 million white American men between the ages of 25 and 54 who have dropped out of the workforce. Not coincidentally, they’ve also dropped out of actively participating in traditional roles of parents and contributors to local communities. The incidence of substance abuse and suicide has risen dramatically in this demographic sector. US males in this age group die from unnatural causes at twice the rate of similarly aged Swedes. Trump’s message was directed at workers whose trade skills and technological prowess lag behind the fast changing job market place.

It is estimated that by the middle of the 21st century, between one quarter and one third of men in the US of prime working age (25-54) will not be working. This is a frightening prospect as meaningful work is a bedrock of most people’s sense of identity. This trend is not talked about in public and if it comes to pass, it will result in lower living standards, greater economic disparities between educated and uneducated Americans of all ethnic groups, and slower economic growth overall. The social and moral crises of a large number of men cast adrift is a topic for another time but it is obvious that the economic growth of the last decade has produced more wealth for holders of real estate and securities and less real work for people at the lower rungs of the educational ladder.

The exclusion of felons and formerly incarcerated persons from most jobs plays a large role in the extremely high unemployment rate, especially among Afro-Americans. The US has experienced a markedly higher rate of employment collapse and more than most other countries due to the large numbers of people who have been incarcerated in our country. Even though crime rates in America today are roughly the same level of the early 1960s, there are roughly 5 times as many people in prison now as back then. Once someone’s in prison, it’s difficult to re-integrate them into the economy. Approximately 90% of all sentenced felons are out of confinement and living among the general population trying to cope with huge barriers to their productive employment.

Tax reform

However varied people’s opinions are of our new president, one of the most promising areas of his discourse was the potential reform of the US tax code. The simplified version of Trump’s program is he wants to reduce taxes on both corporations and individuals, remove many of the complexities of the current code and to incentivize the investment of money in buildings, roads, and the creation of jobs. The unleashing of animal spirits that drove the stock market up during the fourth quarter of 2016 and the first quarter of this year relied on the expectation that at least some of these promises will be fulfilled.

It’s important to understand the way that tax reform is important to the creation of jobs. Jobs are a critical part of our nation’s financial and mental health, especially for the 90% of the population that are not part of the “upper” class. Trump’s political message during the election included a pledge to bring back manufacturing jobs that have been lost to companies moving overseas but most everyone knows these jobs will not be coming back. If companies build new factories in the US, they will import most of the equipment they need and the automated technologies they install will reduce rather than increase the number of people needed on site. New technologies on the horizon, such as the introduction of autonomous driving vehicles will also eventually do away with hundreds of thousands of jobs. For example, if self-driving vehicles reduce accidents, industries such as insurance, car repair, EMT and other medical support companies will no longer be needed to such a great extent.

Most politicians recognize new jobs are created primarily by small businesses. Large enterprises, those with 500 employees or more and ones that are at least 10 years old, tend to reduce the number of jobs available because they can invest in new technology that require fewer humans to operate. It’s easy for people to talk about the need to get banks to lend to small businesses but the risk-taking ability of many banks and their willingness to provide capital to start up entrepreneurs has diminished over the last decade because of the increased scrutiny of government agencies and post-recession regulatory burdens. Most non-real estate businesses that want to borrow money are not concerned with what the Federal Reserve does with interest rates. They believe they are going to make money no matter if the rate they pay is 1% or 2% higher or lower than expected. For many people, going to a bank is too slow a process and the administrative hoops they are made to jump through too burdensome.

There are several inhibitory factors that make banks reluctant to take on lending to small businesses. The paperwork requirements are the same, no matter what the size of the loan is, and the profit on small loans often does not meet their costs of compliance which are extremely high. They have to prove they are treating everyone equally, giving no favors, and they cannot rely on personal relationships. To get a loan, startup businesses need to either show the security of having other income or show they have liquid or real estate assets as collateral. So in order to qualify for a loan, you have to not really need it!

Banks of all sizes have to be on guard against running afoul of the voluminous requirements of the Dodd Frank act, which Trump has railed against. Most banks earn money by keeping it on deposit with the Federal Reserve and so until many of the current rules are dismantled, it’s easy to understand why many banks are not moved to lend money to high risk new businesses, no matter how badly they are needed to support local employment levels.

The main goal of tax reform and the reasons to be given to Congress to support it is that change is necessary to stimulate job creation. Trump is proposing allowing businesses to write-off most of what they spend in any one year so they will get a huge income tax break. This will be an extremely attractive incentive for business people to spend money and maybe even do some hiring. One sure effect of this change will be to expand the size of the federal government’s deficit. The hope is that there will be a marked increase in economic activity that will more than make up for the initial decline in tax revenues collected. It’s a typical Trumpian strategy of borrowing money to take on more risk with the assumption that business activity will grow and pay off the higher debt. We don’t know if that approach has worked for him in the past though i t did work for a while during the 1980s when bi-partisan support and reduced regulations produced an explosion of economic activity, along with some abuses and reduced social services.

State and local governments account for about one third of all economic activity in the US. Private businesses that have private employees are the ones that pay the kind of taxes necessary in order for the national debt levels to be addressed. Many well-meaning individuals are uncomfortable with the idea of cutting taxes on businesses and individuals. They rightfully point to the huge wealth disparity in our country and feel rich people should pay more, not less in tax. One alternative is to give money away to non-working people so they can find productive activities to do outside of the economy. Some Northern European countries are experimenting with this concept but these are countries with huge surpluses not deficits. If taxes are reduced on everyone, the challenge is to find an alternate type of tax collection that encourages investment and therefore creates jobs.

This is not a new concept and many countries have moved to a consumption tax which seems, at first blush, to be regressive, meaning it impacts the lower and middle classes more than rich people. Food and basic services can, however, be excluded from consumer taxes. One form of consumption tax is called “value added tax” or VAT, which consumers pay at the point of purchase because the taxes paid along the chain of production by manufacturers, assemblers, distributors and retailers ends up being included in the final price of the goods sold. One way that Trump can enlist the support of Republicans as well as Democrats in order to help promote small business formation and expansion is to shift to this kind of tax, which would allow personal income taxes as well as corporate income tax levels to be reduced dramatically while not bankrupting the country.

Various forms of consumption taxes could substantially replace the current system’s reliance on income taxes, which produce the great bulk of our government’s revenue. Taxing the consumption of certain goods and services will naturally cut down on those items overall consumption level, and this could be used to target items that society would like to see used less such as cigarettes, alcohol, gasoline, legal services or whatever else people can agree upon. Real leadership would be required to introduce and implement a consumption tax on Americans. A president who was committed to serve only one term would be in an advantageous position to promote such ideas.

Personnel news

Rob: Many of us here in Santa Fe are happy to feel Spring approach and we welcome any form of moisture. The winter was extremely dry but nonetheless, the asparagus patches behind the office began to produce on the first day of Spring like cosmic clockwork. Traditionally, this is when New Mexicans get together to clean the irrigation ditches called “acequias “, a process that involves me getting a small but manageable dose of poison ivy. One unusual trip I took this winter was to the Torres Del Paine National Park in southern Chile. It was fun to visit an island in the Straits of Magellan that serves as breeding grounds for the penguin species of the same name. It was a great trip but long, so I was glad to get home.

Jeff: I recently had the opportunity to participate in an excellent Board Orientation program that was provided by the Santa Fe Community Foundation. There were eight sessions, the presenters were very experienced and knowledgeable, and the topics included nonprofit legal structures, community service, finances and much more. I was one of about fifteen participants from all different nonprofit organizations representing Northern New Mexico and was invited to participate because I am a board member of Coming Home Connection which is an organization that provides free and low cost home care for individuals and families as needed. A current project that I am working on for Coming Home Connection is to establish the first hospice building in Santa Fe.

Anthony: Spring is here and it’s time for us to have some warmer weather. With the move into our new home complete, that has allowed me some free time to sneak out onto the nearby golf course. I am aware that this free time will not last long as we begin plans to start work on our backyard soon. My daughter continues to grow and come into her own as she approaches her second birthday. Our hope is to have the backyard completed by June so we can celebrate her birthday in our new home with family and friends. After that, it will be time for a much-needed summer vacation break.

Kyle: My family and I just completed a spring break road trip with visits to spring training baseball in Phoenix, Legoland and the beach in Carlsbad, California, along with a stop in Las Vegas to see family. At seven years old, James and Johnnie are the perfect age for our visit to Legoland and their excitement was great to watch. It was good to get some family time before my wife starts graduate school to become a nurse practitioner later this spring and the busy summer schedule kicks into gear. Hopefully, in the coming months I’ll find some time to get out mountain biking with the dog before it is too hot for him and me.

Patrick: This winter has seen an amazing flurry of activity for me as I left a good position at Thornburg Investments for my role as a Financial Advisor at the Rikoon Group. I am honored to work with such a talented team and am thoroughly enjoying getting to know our diverse clients and how to better serve them. I was recently accepted as a member of the Mimbres Hot Springs Ranch, an intentional community in Southern New Mexico with organic farming, solar-power, and natural hot springs. I am looking forward to being more involved in the decision making and plans of the unique community where I was born and raised. I also recently joined to the Board of Directors for ARTsmart, a local non-profit that teaches New Mexico youth literacy and life skills through art. I feel blessed to be able to give back to my community and believe that one of the best ways to invest in a better future for our planet is through art education and creative problem-solving for our youth.

Dana: With the advent of some warmer days, I got into the beehives to see how they fared the winter. Two of three hives survived and those queens are nicely building up their brood nests. Sadly, the bee population has taken a serious hit in Santa Fe and surrounding areas. I was hoping that our locale might be spared the plight and blight of bees that is playing out around the country, but such is not the case. We can only hope that the populations will reestablish themselves during the coming season. On a brighter note, both my children have graduations in Southern California in May; my son from USC in law/business and my daughter her undergrad in business and psychology at Westmont College.

Robyn: Things here in the office are going great with our team finding its natural flow. The production of “1984”, adapted from the famous book by George Orwell has opened and I have gotten wonderful feedback on my directorial debut. The play runs through April 16 and it has been the most demanding and satisfying project I have worked on in years. I loved the process and the research, thought and effort on the part of so many people that have gone into it, especially as the themes are so relevant to our community at this time. On April 24, I begin rehearsals with New Mexico Actors Lab for “The Glass Menagerie” by Tennessee Williams. I will be playing the role of Laura and the show is directed by Robert Benedetti, who has travelled around the world directing theatre and written many books on acting and film production.


Please join us for our quarterly gathering to discuss economic and market related events. It will be held at 2218 Old Arroyo Chamiso in Santa Fe on Tuesday, May 23 at 3:30 PM. We generally go until 5:00 PM. The open mike conference call, available to out-of-town clients and friends, will occur the next day: Wednesday, May 24 from 3:30 to 4:30 PM. The call-in number is: 719.234.7872, after which you will be prompted to enter the code: 470070#.