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Sather Financial Group

120 E Constitution St
Victoria, TX 77901

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Climbing The Wall Of Worry
Second Quarter/First Half 2017 Financial Review

To say the least the first half of 2017 has been interesting. The economy is now in the midst of the second longest expansion in history and appears determined to break the record of 10 years. Despite this historic economic growth, the percentage increases have been the lowest since the end of World War II.

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Despite sluggish economic growth, the stock market continued to power higher.

This reversed the earnings declines of the broad market observed through late 2015 and through 2016.

The strong increase in stock prices has also increased valuations to near record levels.

Financials have been strong as the top 34 financial institutions passed their stress tests.

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As the stock market increased, volatility subsided. This lulls investors into underestimating just how lumpy performance can be. It is worthwhile for investors to recognize that since 1950 the stock market has fallen by 14 percent, on average, during any given year. We highly doubt things will be any different going forward.

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Furthermore, short-term interest rates have continued to increase. The Federal Reserve has not only followed through on their rate hikes, but has indicated they will continue increasing short term rates. Our guesstimate is for one more increase in the Fed Funds rate in 2017.

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While the Fed has increased short rates, the 10 Year Treasury yield has declined. As such, at one point in March the yield on the 10 year bond was 2.6%. However, it finished the quarter with a yield of 2.3%.

Usually, when you see longer-term rates declining like this, the market is telegraphing an economic slowdown.

Certainly, the broad inflation guages do not indicate an overheating economy. Rather, inflation finished the quarter at 1.44%.

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Cheap oil, along with other commodities, has helped the end consumer. Unfortunately, fewer petro-dollars circulating through Texas reduces the oil patch for the Lone Star economy. However, cheap energy (along with natural gas) delivers cost efficient heating/cooling and provides inexpensive feedstock to the numerous chemical plants along the Gulf Coast.

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Although GDP growth has been below expectations, more Americans are finding employment. Greater employment, growing GDP and a rising stock market have kept Americans positive.

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Lastly, this week we celebrate the 4th of July. The recognition of our nation’s birth is a testament to the controversies and challenges we have overcome in the past 241 years. I can only imagine what the headlines would have been along the way if we had 24/7 news coverage of every imaginable aspect of life since 1776.

When one considers all we have faced, and will face, it is amazing how resilient our people and economic system are.

We are confident that going forward, there will be a long list of leaders we question and/or disagree with—from all aspects of the political spectrum.

Despite disagreement and discourse, capitalism will trudge forward. It won’t be pretty and we will often question whether the machine is broken. In the process, we will find new and innovative ways to make and deliver merchandise and services.

The economy will grow and people will benefit.

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