The O.T.

Super Bowl 51 is in the history books, and will be remembered for several history-making aspects.

Tom Brady now wears more Super Bowl rings than any other quarterback in NFL history (five).

The Patriots made one of the greatest comebacks ever to win the Super Bowl after being in a deficit for most of the game.

And it was the first Super Bowl to go into overtime.

The U.S. economic cycle could also be described as being in overtime. In October 2016, the U.S. entered its 88 th month of economic expansion – the fourth longest expansion since 1900, and the most sluggish since World War II.  

The current expansion has slogged along at a lower clip than prior expansions; GDP growth since 2009 has averaged 1.9% versus 3.0% from 1980 to 2007. Investors (and voters) grew restless over the anemic growth, which possibly played into their desire for voting for change during the November election.  

However, the slow pace has most likely contributed to its length. We see an increase in the rate of GDP growth from last year to the current: 2016 GDP growth is expected to come in at 1.5% and 2017 growth should come in at around 2.2 percent for the year.

Given the age of the current expansion, and given the new regime in Washington, where do we stand in portfolios?

Highlights from our view on equities:

U.S. Large Cap – we remain overweight domestic large cap stocks due to the benefits from improved GDP growth expectations, though we expect returns to be range-bound between 5% to 7% because we entered the year with high price-to-earnings ratios. We favor value over growth names, and we favor cyclical over defensive names.

U.S. Small Cap – we are overweight small cap due to two primary tailwinds: (1) smaller companies don't trade as much internationally, therefore won't be hurt as much by U.S. Dollar strength and (2) small cap profits suffer more from corporate tax drag than larger companies, therefore they should enjoy higher margins if Trump's corporate tax cuts become reality.

Bonds:

Investment Grade Bonds – we are underweight due to the pressure of rising interest rates. Within bonds, we favor high quality corporate names over U.S. Treasury bonds.

A special note on municipal bonds:

Clients are asking about the potential impact of tax cuts on municipal bonds. Lower personal tax rates reduce the value of a municipal bond's tax exemption.  

We are telling our clients that a strong case can still be made for owning municipal bonds. The market has experienced tax changes even more dramatic than anything President Trump and Congress might enact.  

During the Reagan Administration, the top marginal tax bracket was lowered from 50% to 28% (1986); during George W. Bush's Administration, the top bracket was lowered from 39.6% to 35% (2000's). A comparison of current Treasury yields on various terms on the yield curve versus the taxable equivalent yield at 33% still shows a preference toward municipal bonds.

There is, however, an issue that we are watching: public pension funding in three major Texas cities (Dallas, Houston and Austin) is showing signs of mounting risk. We cannot emphasize enough the extent to which active management plays a role in growing AND protecting your wealth.

The year 2017 will continue to be a year in overtime.


Kimberly Spinks professional photo

Kimberly Spinks

Senior Vice President and Chief Investment Officer at Texas Bank and Trust

Kimberly Spinks has more than 20 years of experience in investment and portfolio management, with much of her career focused on serving the needs of high-net-worth clients. In her role at Texas Bank and Trust, she is responsible for the oversight and management of investment portfolios, as well as asset allocation, research, and setting investment policies and strategies.

 
 
 

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