In the past we have written to you regarding volatility. Investors use volatility as a quantitative measure of risk. However, we view volatility as an ongoing source of opportunity. Accordingly, 2016 provided plenty of both volatility and opportunity. The above image, illustrates the ups and downs and surprises of the year. The two major global surprises included the United Kingdom’s vote to exit the European Union, Brexit, and the election of Donald Trump to President of the United States. Whether 2017 will bring a similar level of surprise and stock market volatility remains to be seen. Accordingly, there are several areas of focus as the President elect’s administration prepares to take office.

Part of the rally in stock markets that we witnessed following the US presidential election resulted from the thought that the new administration would cut taxes. We agree with that sentiment and the potential benefit to corporations and the stock market by going forward with tax cuts. We would suggest that the rally we saw in our restaurant stocks at the end of 2016 resulted in part to the expectation of future corporate tax cuts and the fact that they have primarily domestic revenue streams. We will find out whether markets continue to rise on the expectation of tax cuts, but we expect to see the new administration lower tax rates on the corporate side as well as the individual tax code.

We view infrastructure build as another area that the incoming administration will address in 2017. We felt similarly regarding the new administration’s former opponent. Many infrastructure projects exist that would provide the opportunity to demonstrate putting Americans to work and fixing a dilapidated, in some places, infrastructure. We made one investment at the end of 2016, not based on the winner of the election, but based on the idea that construction demand would rise. The speed at which these projects develop and receive funding could fluctuate, so we may see related stock market volatility there, but we view infrastructure build positively.

The above graph illustrates how volatile oil prices acted in 2016. Generally speaking, we believe the incoming administration will be friendly to fossil fuel producers. After reducing the portfolio’s exposure to zero in that sector in August of 2014, we did tiptoe back into oil and gas in 2016 after the February low in price per barrel of oil. That exposure increased during the year. We will need to monitor the effect the new administration may have on oil supply. Currently, we maintain an outlook for a global production reduction.

In the areas of government regulation and immigration we do not expect 2017 will bring surprises for the market. That of course may change, but we believe taxes, infrastructure, and energy represent the low-hanging fruit for the new administration and expect it to focus on those first. The President elect appears biased toward less regulation, which generally affects businesses and market sentiment positively. Immigration may get left to the backburner by the incoming administration. It seems to have been walked back a bit at the end of 2016. A wall seems unlikely, but generally constructive views on immigration will support US domestic business growth.

We wrote in last quarter’s newsletter that companies’ earnings growth should drive the market one way or the other – not a lot of the other topics de jour. In that newsletter we also wrote that February 11, 2016 marked the bottom of a bear market in the average stock as measured by the Value Line 1700 index from the end of 2014. Although the markets have performed well since then, we do feel some concern regarding the new administration’s approach to free trade. A trade war or wars would not benefit the aforementioned corporate earnings growth. The average American benefits from free trade, specifically from goods produced in low cost geographies. Putting forth a policy agenda limiting that dynamic takes money out of Americans’ pockets. We remain optimistic that the new administration will keep an open mind toward free trade and that corporate earnings growth will continue. Although our current portfolio contains US stocks a significant portion of the companies’ revenues come from overseas. We all benefit from global trade.

We cannot know the future or what surprises 2017 will provide. However, we remain focused and continue to attempt to get ahead of the opportunities that the political and market volatility will no doubt provide. Thank you for letting us protect and grow your assets and we look forward to serving you in 2017.