West Oak Capital, LLC
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January 2017

We welcome your call or email if you have any thoughts you would like to discuss.

Byron, Lisa, Jerry, Tony, Darin and Ian
The year wrapped up as a positive one for investors, even though many big events did not unfold as anticipated.  Last January got off to the worst start in the history of the Dow Jones Industrial Average on fears of a U.S. recession that never materialized.  Throughout the year, the Federal Reserve repeatedly delayed plans to raise interest rates. Then, there were the political surprises.  Britain chose to exit the European Union, while Donald Trump stunned political pundits and foiled Wall Street predictions by winning the Presidency.  At each unexpected turn, capital markets adjusted quickly and relatively smoothly.  Forecasts were wrong, yet markets seemed to shrug it off.  The stock market rally that followed Donald Trump’s victory topped off a year that defied expectations.  
When President-elect Trump takes office, he will have a rare advantage in Washington, as Republicans will control the Oval Office and both houses of Congress.  That has dramatic impact on the direction of the Supreme Court, the Federal Reserve, the Securities & Exchange Commission, regulation of the energy sector and potential for significant changes in immigration, healthcare and tax policies.  It is a game-changer that is prompting spreadsheets all over the world to recalculate, factoring in less regulation, lower taxes and greater domestic fiscal stimulus under the new administration.  It also raises concerns abroad, with attention focused on renegotiation of tariffs and trade agreements between the U.S. and nations that do business with us.  The new administration has promised to be more U.S.-centric, with policies that promote the repatriation of money and jobs.  Infrastructure and military spending are expected to rise.  Of course, it is an open question as to how much of the political agenda will be fulfilled, and at what pace?
In economic terms, we are experiencing a shift from “monetary stimulus” to “fiscal stimulus.”  The Federal Reserve has backed away from its monetary policies of quantitative easing and rock-bottom interest rates.  At the same time, the Trump administration is promising fiscal stimulus in the form of lower taxes and lighter regulation to promote economic growth.  Some of those policies will find bipartisan support, especially in the area of corporate tax reform that may motivate companies to bring huge sums of money back to the U.S. that is currently held overseas.
After fumbling early in 2016, stock prices recovered to post decent gains for the full year.  Oil prices doubled from their February low of around $26 per barrel, giving a boost to the beleaguered energy sector.  While struggling most of the year, shares of financial services companies enjoyed a notable year-end rally on hopes that the election results will bring a more favorable regulatory and interest rate environment.  Expectations for accelerating economic growth also nudged materials and industrial stocks upward.  As we enter the new year, we believe corporate profits need to catch up with rising stock valuations.  The recent surge in prices is based primarily upon hopes for double-digit gains in company profits that analysts are now forecasting for the coming year.  
Interest rates took some dramatic turns.  The 10-year treasury note began 2016 with a yield of 2.27 percent.  As worries mounted for sluggish global economic conditions, rates collapsed below 1.50 percent by summer.  November’s surprising election results sent a shock wave through fixed income markets, prompting analysts to factor higher growth and inflation rates into their forecasts.  By December, with the official unemployment rate below five percent and growth estimates rising, the Federal Reserve finally made its one and only one-quarter percent upward bump in rates for the year.  In all, it was a full round-trip journey that brought the yield back to around 2.45 percent.
Depending upon one’s point of view, the past year might be labeled many different things, but “dull” is probably not one of them.  In the 1970’s, the soft drink 7 Up was marketed as the “Uncola.”  If the advertising company J. Walter Thompson were to create a slogan for 2016, they might similarly call it the “Unmoment,” as events took unusual turns, creating unexpected results and uncertainty for what might come next.  The good news is that capital markets took it all in stride.  It is a remarkable and unexpected twist of fate that generated political alignment of the Presidency, Senate and House of Representatives.  Wall Street did not see this coming but is now optimistic that this opportunity will be put to good use.  In particular, meaningful reforms for corporate tax laws and immigration policies present two areas with strong political support that could be very positive for American companies.
The upcoming year promises to be an interesting one, and we always welcome your call if there are topics you would like to discuss.  We send our best wishes to you and your family for good health, prosperity and happiness in 2017.

Past performance is not indicative of future results. The information contained in this report is based on internal research derived from various sources and does not purport to be statements of all material facts relating to the items mentioned. The information, while not guaranteed as accuracy or completeness, has been obtained from sources we believe to be reliable. Opinions expressed herein are subject to change without notice.
West Oak Capital, LLC
2801 Townsgate Road, Suite 112
Westlake Village, California 91361
Ph. 805.230.8282, Fax 805.230.8283
Copyright © 2017 West Oak Capital, LLC, All rights reserved.

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