Animal Spirits Realized after Election

Animal Spirits Realized after Election
January 6, 2017 phillip_toews_1p9l0e9h

As we flip the calendar to 2017, we are looking at new opportunities and challenges. Regardless of one’s political views, the US markets are looking favorably on the election results. We have seen a rapid rise in stocks since the morning of November 9th. The sentiment that regulation will be eased to spur business development has done a great deal to create a rally after a couple of very choppy years.

Currently, US corporations have over $2.5 trillion stashed overseas (1), choosing to keep it abroad rather than pay the current 35% tax rate to bring it back. A corporate tax “holiday” has been proposed, where foreign cash can be repatriated at a lower tax rate for a limited time (2). Discussion of lowering tax rates for corporations, as well as individuals, has also contributed to the positive sentiment in the market.

When people in other countries look for safe markets to invest in, they often look to the United States. Many of the global household names of investing are still American companies, even as the world markets expand. When countries destabilize, as Venezuela has in recent years, an obvious choice for the more affluent of that country is to emigrate to the US and bring their money and expertise with them. In other less extreme cases, in China for example, people try to maximize their investments here, up to the legal limit, and for some even exceed it.

As Markets Trend Higher, Risks May Increase

The geopolitical risks of Russia, China, and the Middle East, as well as weakness in the purchasing power of some of the emerging markets like Brazil, may pose threats to our markets. The fragility of the EU is seen as increasing as the Brexit and recent violence have strengthened the nationalist and anti-EU parties. Should Italy or France vote to leave the EU, as some political parties there have threatened, it is seen by some as unrecoverable.

The new administration’s promises to re-negotiate trade agreements and take tougher stances with our trading partners create another potential flash point that could turn markets lower. The interconnectedness of markets, and the reliance of U.S. firms on imports to build their own products, means that if even the threat of trade wars emerge, markets may turn negative quickly.

As a final point about stocks, this stock market bull has already lasted longer than normal. On average we experience two 37% declines per decade (3). Even if one does not look at high valuations, risks of a new unconventional administration and global aggression, we believe that the probability of significant declines in the years ahead is high.

As Stocks Rise, Bonds Fall in the Fourth Quarter

Rising interest rates may have played a part in spurring stocks higher, but have also triggered bond losses. For over 30 years, interest rates have been falling, helping to push up the value of bonds. This has contributed to the feeling of stability and safety that most associate with bonds. With a rise in the Federal Funds Rate of a quarter of a percent in December and projections of 3 more raises next year, we are likely near a tipping point where we could enter a bear market for bonds which could last decades. Rising interest rates usually cause bond values to fall, pushing people toward stocks and away from low paying bonds. This trade of stability of bonds for growth potential of stocks usually brings the market up with it; but, as stated above, the market is already overvalued.

Although Toews held high yield bonds during a majority of the quarter, we exited long term, investment grade bonds in reaction to the move lower in bonds. Our models are designed to attempt to ameliorate losses in the bond markets if this asset class enters into a prolonged decline.

Preparing Portfolios for Turbulent Markets

We believe it is important to position portfolios for the best-case scenarios as well as the worst-case scenarios. That means that we hope to gain if stocks continue to trend higher in 2017. Yet, we are poised to become defensive in the early stages of declines if markets fall. During late stage bull markets, there is a tendency for risk-managed strategies to trail markets. As a result, investors tend to abandon loss-avoidance strategies, even as risks become elevated. Our behavioral advice this quarter is to maintain and rebalance into risk managed strategies as a portion of your over-all portfolio in order to anticipate challenging markets ahead.


Prior performance is no guarantee of future results. There can be no assurance, and individuals should not assume, that future performance of any of the portfolios referenced will be comparable to past performance. There can be no assurance that Toews will achieve its performance objectives.

This commentary may include forward-looking statements.  All statements other than statements of historical fact are forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”).  Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct.  Various factors could cause actual results or performance to differ materially from those discussed in such forward-looking statements.

This commentary is intended to provide general information only and should not be construed as an offer of specifically-tailored individualized advice.  Please contact your investment adviser, accountant, and/or attorney for advice appropriate to your specific situation.

This document refers to the performance of the majority of Toews portfolios to illustrate the effect of Toews management on US and intl. stocks and high yield bonds. Performance of individual accounts varied based on the client’s investment risk profile and their specific investment funds. For your individual account performance, please refer to the enclosed quarterly statement or the quarterly statement recently sent to you. In addition, not all model portfolios were referenced in this letter. It is not, nor is it intended to be, a comprehensive accounting of Toews asset management. There are other portfolios that Toews manages that performed differently than what is referenced in this letter. For a complete list of GIPS firm composites, their performance results and their descriptions, as well as additional information regarding policies for calculating and reporting returns, please go to Toews Corporation acts as the investment advisor that implements the asset allocation and models for each of the portfolios. Investors cannot invest directly in an index.

(1) Source: Capital Economics, accessed 1-3-2017.
(2) Source:, accessed 1-3-2017.
(3) Source:, accessed 3-2015.