The markets in the first half of 2017 have been the strongest in years. But what got us here?
In 2008 to 2010, it felt like the end of the world. The housing market had fallen, the stock market was down over 38% and nothing made much sense.
One of the saving graces was that all of our clients were out of the market during the 2008 crash (that’s a different story).
In 2010, the Federal Reserve under Chairman Ben Bernanke started to lower interest rates. The rates continued to decrease until mid-2016, all the way down to 0%.
An example is: In 2010, you could find a 1 year bank CD at 6%, now you are lucky to find one at 0.80%.
So now the world has changed and we have a new President in office and the most common question I receive from my clients now, “Is this recovery/boom in the market because of President Obama’s policies, or President Trump becoming elected?”
In order to understand the answer, I draw the following analogy.
Imagine it is 2010, the market has been crazy and now you are fishing in the Florida Keys. It’s a calm day, little wind, not too hot. The boat you are on is an older wooden fishing boat.
You are a little nervous after the storm (stock market crash) so you only place one line into the water. Every so often you catch a fish. The fish in this analogy represent US stock market growth.
Unknown to you, the Federal Reserve from 2010 to 2016 is planting lots of coral. The coral feeds and attracts fish. The coral in this analogy represents lowered interest rates.
As interest rates are lowered, corporations can borrow money cheaper making money easier to find and to invest.
Cash flow increases and all of the larger corporations in America benefit. There are hundreds of fish below you on the boat but, you just can’t see them.
Suddenly in 2016, on November 7th, a new President is elected. President Trump is arguably pro-corporate America.
He campaigned on lowering corporate income tax rates, allowing banks to do more than just bank, and change trade treaty’s to allow US Corporations to benefit. (As of the date of this article, none of these have actually passed and have become law.)
So imagine you are back on the older wooden fishing boat on November 7th, 2016 with one line in the water, lucky to catch a fish now and again. Then suddenly your boat turns into a glass bottom boat.
Now, my gosh look at all those fish! You can see that there are hundreds maybe even thousands of fish below you swimming though the coral.
What do you do? Drop every fishing line you can as quickly as possible. Good hunting.
So what is the rest of year going to bring? As we discussed before, I am cautiously optimistic.
If President Trump passes tax reform this year, you might need a bigger boat. But, if he does not pass tax reform this year, then there is still plenty of coral feeding the fish.
Remember, plan today… protect tomorrow.
Until Next Time,
Peter Blatt is the president at Blatt Financial Group. He has more than 17 years’ experience in the financial industry. He received a bachelor’s degree in accounting from Boston University, a law degree and a post doctorate degree in tax from the University of Miami School of Law. He is an active member of the Florida Bar Association, the Palm Beach County Bar Association and the former secretary of the Tax Section of the Florida Bar. He has been published or quoted in numerous periodicals including The Wall Street Journal, Yahoo Finance, SUCCESS Magazine and on Fox Business News.