Hall Capital “Market Views” Newsletter January 2017

This is the 27th edition of Market Views from HALL CAPITAL. Our aim is to provide concise views of where we see risk and opportunity for investors.

Trump Wins Election
- now what?

IMHO the reason the stock market has moved higher since the election has less to do with confidence in the new president than in the implications of the surprising GOP sweep of all three branches of the government.

With the Republicans in charge it is now quite likely that we will have some form of tax reform with lower corporate tax rates. This will make US companies more competitive globally as the US currently has the highest nominal corporate tax rates (though not the highest "effective rates") of the major economies. A "tax holiday" is contemplated which will encourage some significant part of the $2 trillion that US companies have been keeping overseas to avoid taxation to come back and either be invested in the US or paid out to shareholders.

Less regulation and a return of "animal spirits" are cited as other welcomed developments. Although these are positives, the impact is speculative and hard to quantify, whereas tax reform has a clear corporate benefit.

So that's the good news. Now for the other kind. In addition to the usual risks that we have to contend with par usual, such as inflation/deflation, impact of rising interest rates, teetering European banks, etc, we have two new risks: 1. trade wars and 2. foreign policy snafus. We have to consider trade wars as a risk since DJT has indicted that slapping 45% tariffs on imports (notably Chinese and Mexican) is tool he might use. As to foreign policy, the casual challenge to the "one China" policy makes one wonder if this is just the beginning of a series of provocative acts by the Commander in Chief.

Bottom line: the odds of the "good", such as tax reform, are high. The odds of us actually risking a trade war are low. The odds of a global policy snafu are hard to assess. While the odds of the "good" are high and odds of the "bad" are low, the outcome associated with the bad are potentially very bad, indeed. So better to hedge to some degree.

Ebullience is Not Evenly Spread
- between stocks and bonds

For the final quarter bonds were down as much as stocks were up. This too was driven by the election which ushered in expectations of policy moves to juice the economy while taking some risk with debt and inflation. Good for stocks, not so good for bonds.

Though bonds are due for a bounce, they still do not offer an attractive risk return trade-off longer term. This is not so much because the risk is high (no significant inflation in sight), but that the return is uninteresting. And longer term the risk does increase.

As to stocks, as mentioned above we have opportunity that is matched with some unusual risks. Optimism is too high and a meaningful pullback is likely in Q1. We will be looking for those opportunities in individual stocks that inevitably turn up from time to time.

Stock groups did somewhat of a "do-si-do" in the latter half of last year with the prior winners (health care, technology, and consumer staples) becoming laggards, and the prior losers (energy, financials and cyclicals) becoming winners. Financials have under-performed for so long that their turnaround could well continue for awhile, especially if interest rates edge higher. The lagging performance in the recent market strength by the health care and technology sectors is unlikely to continue. Though there is uncertainty on how health care will be delivered in the future, there is little uncertainty that we will need more of it.

Focus List Enjoys Another Good Year
- despite lagging in Q4

A strong bounce in recently added Genesco was not quite enough to offset declines in our two healthcare related stocks in Q4. Nevertheless, the Focus list turned in 14.3% for 2016, compared to 11.96% for the S&P 500. Since inception in 2010 the published Focus List has earned 15.1% per annum compared to 13.3% for the S&P 500.

We are replacing Genesco with Alphabet, fka Google. GOOG lagged the market in 2016 due to the rotation of investor preferences. Competitive position is a key element in our selection criteria. There are few companies with a stronger competitive position than Alphabet.

For individual stocks as well as selection strategies, past performance is not necessarily indicative of the future.

Hall Capital Focus List

Follow Up – from our letter one year ago

"With inflation below 2%, the Fed is clearly on a dovish path and we are only likely to see a maximum of two hikes in 2016..."
- The Fed hiked rates once in December.

"...some terrorist group will likely strike the US or one of our allies in 2016."
- The above written right after the 12.15 attack in San Bernardino. 2016 saw attacks in Orlando, Brussels, Nice and others.

"While any of these items could cause the market to sell off, any decline would be limited if we began to see meaningful wage growth in the US. IF the job growth trends continue and the unemployment rate in the US drops below 5%, the ensuing labor market tightening should provide some welcomed wage growth. This would be a favorable development for the stock market"
- Real wage growth began to accelerate mid year up 2%; unemployment fell to 4.6%. Stock prices dipped 9% in February, but ended the year UP 9+%.

NOTE: Now in addition to ALL our quarterly letters, on our website is a tab with just the Follow Ups.

About HALL CAPITAL

HALL CAPITAL, LLC is a registered investment advisor and was formed by Principals from Arcturus Capital in 2010.
For more information, contact Donald Hall 626 578 5700 x101 dhall@hallcapitalmanagement.com

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