West Oak Capital, LLC
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October 2017

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

Byron, Lisa, Jerry, Tony, Darin and Ian
Market activity and headlines in recent weeks conjured images of sailing ships and circus animals.  Reports on corporate profits, employment and economic activity have been favorable, yet the capital markets have been experiencing a period of eerie calm.  Perhaps Wall Street expectations for the President’s agenda are at an inflection point.  Early going in the new administration’s term of office has been rancorous, compelling analysts to reassess the likelihood and timing of promised reforms that were the basis for rising growth expectations.  In other words, the strong winds that blew in the favor of capital markets early this year have stalled a bit.  To borrow from 18th century sailing terminology, we have been in a subtle case of the doldrums over the summer.  
Ringling Brothers took down its circus tent for the last time in May after 146 years of operation, leaving Washington as the “Greatest Show on Earth.”  Politicians are the center of attention.  The characters in the show are thriving, while the people they are supposed to represent are expressing dissatisfaction at historically unprecedented levels. There is no clearer evidence of voter frustration than the elections last November.  As an “outsider,” the new President was expected to blast open the entrenched interests in DC and renew economic growth by cleaning up the regulatory quagmire, rebuilding our nation’s failing infrastructure and updating our antiquated corporate tax code. 
Healthcare has long been a staple in the political arena.  Whether it’s framed as fixing the Affordable Care Act (ACA) or “repeal and replace,” there is bipartisan agreement that the system needs work.  Signed into law in 2010, the constitutionality of the ACA was narrowly upheld by the U.S. Supreme Court in a 2012 decision that interpreted the “mandate” portion of the program as a tax.  That tax is expected to affect roughly 100 million citizens, primarily low-income households, at a cost of $22 billion next year.  The taxes are widely unpopular among Democrats and Republicans, yet fixing even the most punitive provisions within the ACA seems surprisingly difficult.
Reforming our nation’s cumbersome tax code ranks high on the list of priorities that could ignite a higher rate of growth for our economy.  Avoiding high U.S. tax rates has bred a host of complicated strategies that allow companies to escape paying the taxes.  Instead of a windfall, decades of noncompetitive tax policy have sapped the U.S. of valuable resources as American companies stashed trillions of dollars in other countries that were happy to harbor the money.  Democrats and Republicans agree that bringing funds back to the U.S. would be good for our economy. However, even on matters where parties seem to agree, there is no greater drama and suspense for the show inside the beltway than efforts to reform the tax code.
While Congress and the White House act out in the big center ring of the circus, on their flank is the Federal Reserve (the Fed), which has been methodically going about the business of removing monetary stimulus put in place after the 2008 credit crisis.  At its most recent meeting, the Fed announced it will begin trimming its balance sheet.  This is the third and, potentially, most sensitive step toward returning our economy to “normal” monetary conditions.  First, they halted the bond purchase program called “quantitative easing.”  Then, they began to gradually raise short-term interest rates.  Now, they are actually reversing course by selling bonds or allowing them to mature.  This has the effect of shrinking money supply in the economy, as money gets paid back to the Fed.  Fixed income markets have been remarkably sanguine in light of these adjustments, with the bellwether 10-year U.S. Treasury yield nearly unchanged for the year at 2.31 percent.  Even though the official unemployment rate has dipped to 4.4 percent, there has been scant evidence of rising inflation that could trigger a surge in interest rates.
Republicans expressed dismay when President Trump sided with Democrats on a budget deal.  President Trump is not a Republican in the traditional sense of the word.  His views are often at odds with Republicans, almost as much as they are at odds with Democrats, and he embraces a confrontational style that is unusual in diplomatic circles.  The budget deal postpones debate on the debt ceiling until year-end, and tax reform may have a similar timeline, which means discussion of these important matters could be delayed until a time of year when most people are focused on holiday activities.
While stocks and bonds have been in the doldrums, Mother Nature has been blowing some fierce winds in the Atlantic.  An exceptionally damaging hurricane season has already blasted much of the southeastern U.S. and Puerto Rico.  It is a humanitarian disaster, and one that is likely to garner a rare act of cooperation in DC as federal aid pours in to rebuild areas hit hardest by the storms.  Hopefully, one compassionate moment will lead to another, and the donkeys and elephants will put their differences aside for the good of the country.  That is, after all, the reason we elected them, and it would put wind back in the sails of the capital markets.
Please let us know if you have any questions.  If you call, you can say “hello” to Rebecca Ehrhardt, who recently joined West Oak Capital as Operations Specialist.

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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