Hall Capital “Market Views” Newsletter January 2018

This is the 31st edition of Market Views from HALL CAPITAL. Our aim is to provide concise views of where we see risk and opportunity for investors.

Tax Cuts are a Boon to Corporations
- and the investors who own them

The nominal Federal corporate tax rate was slashed to 21%.  Most corporations are paying nowhere near the nominal maximum rate of 35% due to loopholes, but clearly the average rate paid is higher than 21%.  Thus, most of the $1.5 T tax cut will benefit investors, if not the average worker.  In the long term, average workers will need to see some benefit by new policies not yet enacted or a political backlash could ensue.

Is increasing the debt to someone in the future to provide tax relief to current tax payers wise? We are not here to moralize, but to merely note the obvious: corporate tax cuts are a gift to current investors which is one reason the stock market has been strong and will likely continue to advance, though not at the same rate. The impact of higher deficits (and it could be higher than $1.5 T) will be a concern at some point but not before our next letter.

One thing is clear, while the economy COULD grow enough to close the $1.5 T expected deficit, it will not do so merely because of the tax cut.

Predicting is Difficult
- especially about the future

Wall Street strategists provide predictions for the market for the coming year. They know these predictions are worthless, but they have to make them because clients demand predictions.

Successful investing is not about accurate predictions but managing opportunity and risk in the face of uncertainty. The future is ALWAYS uncertain and if an investor invests as if he or she knows what will happen, that investor is living dangerously.

The art of successful investing is to think "probabilistcally". That is, lean into the most likely outcomes.  Set "house odds" for your portfolio.  Know that, while the future is always uncertain, there are times when one can act with more conviction than others.

All that said, here are some "leanings" that we would want to consider in constructing a portfolio going into the new year:

Based on some short term juice provided by the tax cut and the more important current trends in global growth, we expect the US economy to continue to grow in 2018. This scenario would favor stocks over bonds, despite record high stock prices and the extended length of the recovery. Stock price levels predict little about one year out. Neither does the length of a recovery.

Risks include a sharper rise in interest rates than expected which could be related to overheating which in turn could be the precursor to a recession. After all, the main central banks globally are switching to selling bonds, rather than buying them. Exogenous global political risks have to be mentioned, but investors have shrugged off belligerent talk of nuclear war as mere bluster.

Bottom line: the current environment is attractive for investors, at least stock investors.  Expected returns are lower, however, due to higher starting price levels.  Trends are currently positive but obviously the environment could change.  Hence, though we are leaning toward opportunity, we would advise some hedges.

I would encourage you to go to www.hallcapitalmanagement.com  website and check out the tab that excerpts all the Follow Ups from all our quarterly newsletters over almost eight years.  I think you will find the "leanings" have been generally constructive to a profitable investment outcome, not to mention the out performance of the Focus List.

Focus List Returns Over 33% for 2017
- outperforming yet again

The Focus List returned 8.8% in the last quarter which boosts the 12 month return to 33.7%, well ahead of a strong S&P 500 which was up 6.6% and 21.8% for the same periods.

Since inception almost eight years ago the Focus List has averaged a compounded annual return of 18.3% vs 16.0% for the S&P 500, even though the past several years was a time when the S&P 500 was a hard index to beat.

Note also the FL is a long term hold portfolio with no short term gains.  If this return were equated to the taxable equivalent, the FL return would be even higher.

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

"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"
- Trump's approval rating is at a record low but the market is at a record high. Opinion unchanged.

"With the Republicans in charge it is now quite likely that we will have some form of tax reform with lower corporate tax rates"
- Corporate tax rates were slashed to 21%.  This and a bending up of global growth were drivers of stock market strength.

"Bottom line: the odds of the 'good', such as tax reform, are high.  The odds of risking a trade war are low."
- So far we have the 'good' without the 'bad'.  (When I say the tax bill is 'good', it is good for the stock market and wealthy investors. It may be neutral to even negative to the rest of the country.)

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

HALL CAPITAL | 199 S. Los Robles Ave | Suite 535 | Pasadena | CA | 91101