HJ Sims’ 2017 Outlook

Published January 10, 2017


As we mentioned last week, interest rates declined or were stable for 85% of 2016. However, since the election of November 8th, interest rates have risen. What can we look forward to in 2017? Let’s review three factors: History, President-elect Trump and the Federal Reserve.
 
Over the past 70 years, the bond market has had two major moves – up and down.

Year30 Year U.S. Government
Bond Interest Rate
19462.37%
198115.21%
20162.10%

Should we expect this pattern to continue? During the past 6 months, the 30 year U.S. Government Bond interest rate has risen from 2.10% to 2.96%. Are we on our way to 15% again?

The two huge bond market waves during our lifetimes will most likely not be repeated. Far more normal are the bond market movements earlier in the 20th century.

Year30 Year U.S. Government
Bond Interest Rate
18993.20%
19205.56%
19462.37%

It is clear that major bond market movements last a while, but the rate changes over the last 70 years have been extraordinary.
 
President-elect Trump’s policies will affect the bond market, but his policies are not yet well known. What should we expect?

  1. An emphasis on economic growth
  2. Nationalism over globalism
  3. More domestic investment – fracking, Keystone Pipeline, highway construction
  4. A dislike of red ink and government waste, resulting in lower expenses for certain domestic government programs

It usually takes at least a year for a President’s policies to affect the economy. However, the prospect of a higher economic growth rate will increase interest rates. According to Lance Badorf, a Vice President of HJ Sims, the Federal Reserve and the current Administration “put a collar on the dog” for good reason over 8 years ago, and they have not removed it. Look for the new Administration to “release the hounds and let the economy run free.”
 
Higher interest rates have also been signaled by the Federal Reserve. Here, the bond market has been ahead of the Fed, which has to be careful; interest rate rises increase the U.S. Government deficit which in turn could lead to higher rates – a very scary cycle indeed. We believe that these market forces will make our current interest rate cycle more like 1899 – 1920 than the one from 1946 – 1981.

The outlook for the bond market as well as the stock market will be on the agenda for the Sims Conference in Austin, TX from February 28 – March 2. Dr. Ehud Ronn, a Stanford PhD and an award winning Professor of Finance at the McCombs School of Business at the University of Texas, will present his outlook on the markets. To register, please visit the following link: hjsims.com/register.

The material presented here is for information purposes only and is not to be considered an offer to buy or sell any security. This report was prepared from sources believed to be reliable but it is not guaranteed as to accuracy and it is not a complete summary of statement of all available data. Information and opinions are current up to the date of publication and are subject to change without notice. The purchase and sale of securities should be conducted on an individual basis considering the risk tolerance and investment objective of each investor and with the advice and counsel of a professional advisor.

This is not a solicitation to buy or an offer to sell any particular investment. All investment involves risk and may result in a loss of principal. Investors should carefully consider their own circumstances before making any investment decision.

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