January 2017 Newsletter to Clients

Enjoy this month’s edition that features an update on the economy, stock market and interest rates.

 

Economic Outlook: According to the latest Kiplinger insights, the USA will experience faster growth in 2017, 2.1%, versus last year’s 1.6%. It suggests the coming income tax cuts and infrastructure spending will have a delayed effect because consumers will pay down debt and Congress won’t approve extra spending until 2018. We would postulate the stock market bounce, the largest ever in reaction to a presidential election, suggests a stronger economic surge.

 

Since hitting an astonishing high interest rate (near 16%) in the early 1980s, the ten-year Treasury Note rate declined to a low of 1.37% in June 2016. The rate is approaching 2.5% and is predicted to reach 3% by the end of 2017. Higher rates are good for the US dollar but a bit of an economic damper. Considering European travel? Take advantage of the lower Euro, now close to parity with our dollar compared to 1.35 when we traveled in France five years ago.  

 

Mortgage rates are rising but Kiplinger predicts an 11% increase in housing starts in 2017 up from 9% last year. Inflation should rise to 2.5% boosted by higher energy prices. Short term interest rates will continue to rise also. Most experts believe the Fed will ratchet up rates at least twice this year.

 

LIBOR At 1% For The First Time In 7 Years: This is a SeekingAlpha.com headline. The three-month LIBOR reached 1% on Dec. 29, 2016. LIBOR, which stands for London Interbank Offered Rate, is a benchmark interest rate that most of the world's largest banks charge each other for short-term loans. This rate is similar to our Prime Rate which is usually used as a base for most floating rate consumer loans. The borrower pays a premium over this base rate, such as Prime plus 1% or more. Most corporate borrowers have their loans tied to LIBOR. The three-month LIBOR rate has nearly tripled during the past three months.  

 

This change is significant for our BlackRock Floating Rate and Lord Abbett fund investment holdings. Happily, BlackRock Floating Rate Income Trust (BGT) announced a ‘special’ extra distribution of 6.7 cents in addition to its regular 5.83 cents. BlackRock Floating Rate Income Strategies Fund (FRA) is paying a ‘special’ distribution of 8.2 cents along with its regular 6.1 cents. Both funds’ payments will hit our accounts on January 9th. Floating rate loan funds tend to perform well when short term interest rates are expected to rise and are rising. BGT has risen from a 12-month low price of $11.52 to $14.08 at year-end, a 22% change.

 

A massive stock market rally is at our doorstep, according to several noted economists and distinguished investors. Ron Baron, CEO of Baron Capital, thinks: “It’s going to be 30,000.” Larry Edelson, a Money and Markets editor, predicts: “The Dow Jones Industrial will lead the way higher and catapult to 31,000 over the next two years.” Jeffrey A. Hirsch, editor-in-chief of the Stock Trader’s Almanac, believes it will go even higher: “The Dow Jones Industrial Average will surge to 38,820 in a ‘super boom’ beginning in 2017.”