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Quarter 1, 2017 Newsletter

As we head into the second quarter of 2017, about the only thing we know for certain is that we indeed live in interesting times. A complete political outsider has taken the reigns of the world’s most powerful and influential country, and while many fear President Trump’s lack of political experience and apparent disregard for “how things have always been done,” others are excited about the exact same qualities.  Thus far, it appears that the market is comfortable with a Trump presidency and his early agenda as the S&P 500 is up more than 10% (not including dividends) since the market opened on November 9th.

While a lot has changed over the past few months, the fundamentals of investing remain the same. They are timeless and often tedious.  It is our belief that in the long run, earnings drive stock prices.  As investors, we are really investing in a stream of future earnings discounted to today’s value.  So it doesn’t matter what the New York Times, Fox News, or “All Things Considered” tell us to think.  What truly matters are the earnings of the companies we follow and purchase on behalf of our clients.

So what about the earnings? S&P 500 earnings declined for five consecutive quarters beginning with the 2nd quarter of 2015.  This “earnings recession” had some experts and economists worried that the United States economy would also experience a recession.  However, corporate earnings growth has since found its footing, led by a rebound in the energy sector.  Earnings as a whole resumed growth in the 3rd quarter of 2016, are estimated to have risen a strong 8% in the fourth quarter, and are expected to grow at a near 10% clip in 2017.

While a number of factors have contributed to the “Trump Rally” over the past few months, an expectation that earnings growth is poised to pick up has likely been the main driver. Like it or not, it is clear that the new administration will attempt to follow through on virtually all of its campaign promises, including many that are business-friendly.  Thus, whether the current market rally continues will have much to do with whether the administration is able to effect meaningful change in areas such as corporate tax reform, business deregulation, and infrastructure spending, all of which would serve to boost corporate earnings.

Federal Reserve policy has also had an impact on the market in recent months. Historically, rising interest rates have been viewed as being negative for stock prices.  This is in large part because higher rates reduce the present value of a company’s future earnings stream.  With that in mind, we at Gamble Jones, along with many other market participants, are following Fed policy with a keen interest.  On March 15th, Federal Reserve Chair Janet Yellen announced the decision to raise the federal funds rate to 1.0%.  The increase was greatly anticipated, and the initial market reaction was positive as fears the Fed would begin to aggressively raise rates dissipated upon Ms. Yellen’s comments that the Fed would “continue to be accommodative for some time to come.”  Though the Fed is expected to follow up with two additional hikes this year and will likely continue to raise rates gradually after that, interest rates are still poised to stay well below historical averages for the foreseeable future.

At any given time, there are a whole host of events ranging from geopolitical issues to natural disasters that can spook investors and impact stock prices in the short term. The upcoming elections in France and Germany as well as political drama in any number of forms right here in our own backyard have the potential to add to market volatility in the near future.  However, our focus will remain centered on projecting the long-term earnings potential of the companies that we follow and determining the price that we are willing to pay for them.  It is our opinion that the market as a whole is currently fully valued.  However, we still see pockets of value and will continue to take advantage of such long-term opportunities.


Gamble Jones Capital Management

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