Is the Trump Bump an Example of Irrational Exuberance?
The stock market continues to soar. The natural question is: How long can this go on?
The market’s behavior reflects high expectations of the Trump administration, particularly with regard to cutting corporate tax rates and scaling back business regulation. So far there has been more talk than action, but that should not be surprising. The biggest changes will need to run through Congress and, in many cases, require some degree of bipartisan support.
The relatively moderate tone of President Trump’s recent speech to a joint session of Congress suggests that he understands that he needs some Congressional support to advance his agenda. Sweeping executive orders get a lot of publicity, but can only accomplish so much.
President Trump still has hundreds of politically-appointed key jobs to fill in the executive branch—the people who are needed to execute the change in direction he is trying to bring about. The main cabinet secretary positions are getting filled, but there is still a long way to go. So, for the time being, we are waiting to see how things play out in Washington.
And as always, we’re paying close attention to interest rates and moves by the Federal Reserve. Fed Governor Jerome Powell of the Federal Reserve, in a recent speech, sounded very optimistic about the economic outlook for the U.S. He explained how Fed policymakers evaluate alternative policy paths using a Taylor-type rule. Unless you understand advanced statistical modeling and forecasting, it may strain your vision.
Meanwhile, minutes of the latest FOMC meeting indicate the Fed plans to raise rates “fairly soon,” if the economy cooperates. Whereas the prospect of rising rates used to spook markets, today the markets view it more positively. Why? The focus has shifted from worries that rising rates will slow down economic activity, to the view that if the Fed is preparing to raise the discount rate, it must be expecting a serious and sustained uptick in the economy (and thus inflationary pressures that the Fed wants to moderate).
So, our basic stance is: Enjoy the market’s advance while it lasts, but don’t expect the run to keep up at its current pace indefinitely. Continue to maintain an appropriately balanced asset allocation profile across multiple asset classes.
The Role of Muni Bonds
One asset class we have favored lately and continue to do so is municipal bonds–even though, as with any other kind of bond, their market values will slide as interest rates rise. We’re attracted to the ability to lock in some attractive after-tax yields, for those investors who are focusing more on income than capital gains opportunities.
As Barron’s recently pointed out, a ten-year high-quality municipal bond is now yielding around 2.45%. A year ago it was 1.9%. You’d need more than a 4% yield on a taxable bond to give you that 2.45% yield on an after-tax basis, depending on your tax bracket.
In case you want to do the math for yourself, here’s how you do the calculation. To determine what a muni yield equates to on a before-tax taxable bond yield, you divide the tax-free yield by your “after-tax factor.”
You get that figure by taking the number 1, subtracting your marginal tax rate (include both state and federal taxes, unless the muni bond was issued in your state) from it (like 1 minus 40%, or 1 minus .40 = .60), then take the decimal and divide it into the tax free return. That examples assumes you’re in the 40% tax bracket. So, if you have a 3% tax free return, you would divide 3 by .6, and voila, the result is 5, meaning that you’d need a 5% yield on a taxable bond to equal the after-tax yield you’d get on a muni yielding 3%.
Today the yield on a 10-year U.S. bond is close to 2.5%–about half the yield on a 10-year taxable corporate bond, so munis blow away Treasury bonds on an after-tax basis. (A slight complication in the calculation is that U.S. bonds aren’t subject to state income tax, which makes their after-tax yield slightly more attractive than a corporate bond with the same yield. But you’re not likely to find a corporate bond with a yield close to as low as a U.S. bond.)
Naturally, credit risk is another important consideration when buying bonds. But highly rated municipal bonds have a default rate only slightly higher than the government rate–which of course is zero.
How to Introduce and Position Yourself the Right Way
Introducing yourself – more to getting it right than you think!
What do you say when someone asks you “so what do you do?”
You might say, “I’m a financial advisor”. Or “I’m an investment advisor”. If you’re a top advisor, you might be compelled to say “I’m Vice President and Portfolio Manager”. Or even “I’m a CFA”.
Well put all of those away if you’re introducing yourself to a woman you might want as a client. None of the above will impress her – she might even “run for the door” thinking you’re going to try to “sell” her something.
Your goal is have her say “tell me more about that”.
So what do you say?
Here are 4 quick tips:
- Make it about your clients
- Make it about outcomes
- Make it interesting
- Make it fun
How about something like this: “I help people have their cake and eat it too”. Doesn’t that beg the question “what does that mean” or “how do you do that”.
Okay maybe that’s a bit over the edge but it’s important you make it about the people you help and not about what you do to help people get there.
I help <type of people you serve”> <achieve this>. Something like:
- I help retirees create a sustainable income.
- I help women understand money on their terms.
- I help young couples get a good start towards financial security.
Now you try it! Send us your best one.
Find more resources and follow us through our website www.strategymarketing.ca
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