Quote of the Week

“Nothing gives one person so much advantage over another as to remain always cool and unruffled under all circumstances.” – Thomas Jefferson

Technical Corner

Last week set new records for the market indexes as the market slowly grinds upward. The UPI remains at 25 out of 100. I believe we are in a global recovery that shows no signs of changing direction.

As I am sure you are aware, we made changes to most portfolios in the last two weeks. We have lowered out exposure to alternatives and increased our exposure to equities.

I was planning to write about the tax reform/cut bill going through Congress. I am holding off until we get more clarity as to the final bill. One suggestion made, but not proposed, is the limitation of tax deductibility for contributions to retirement plans. This was a terrible idea. Most Americans would decrease or stop their contributions altogether. We have enough of a savings crisis in this country now.

Our allocation remains the same as last week for most investors: 85% equities, 0% bonds, 10% alternatives, and 5% cash.

Larry’s Thoughts  Spanish Showdown, Slow Brexit

With separatists in Catalonia pushing for independence, Spain’s democratic government is facing a constitutional crisis. Meanwhile, little progress has been made in negotiations on the terms of the United Kingdom’s pending exit from the European Union.

Geopolitical tensions can affect economies and move financial markets. Here’s a closer look at these two political standoffs taking center stage in Europe, either of which could influence national growth prospects as well as some international investments.

Spanish Instability

Catalonia is the northeastern region of Spain that includes Barcelona. It has its own language and cultural heritage. The region has 7.5 million residents, or about 16% of Spain’s total population, and it accounts for nearly 20% of Spain’s gross domestic product (GDP).1

The historical roots of this conflict are complex, and some divisions have existed for decades if not centuries. However, the current situation stems from a 2015 election that put separatist parties in control of Catalonia’s regional parliament.2

Spain’s 1978 constitution requires a nationwide election for any one of the 17 autonomous regions to gain full independence. On October 1, Catalonia held a unilateral referendum on independence, even though the nation’s constitutional court had ruled it illegal. Violence broke out between police and voters, leading to public demonstrations.3

In an attempt to restore order, Prime Minister Mariano Rajoy invoked Article 155 of the Spanish Constitution, asking for emergency powers that were granted by the Senate. The Catalan government is being stripped of its autonomy, and certain agencies could be controlled by the central government in Madrid until new elections are held on December 21, 2017.4

Economic Costs

Catalan leadership contends that the current tax structure is unfair and the region would be better off on its own. But EU officials have backed the Spanish position, and Catalonia seems to have the most to lose, at least in the short run.5 More than 1,100 companies have already started the process of moving their legal headquarters out of the troubled region.6

If political unrest escalates, tourists might avoid Spain and especially Barcelona, a popular destination that welcomed 8.4 million travelers last year. Tourism accounted for a significant slice (14%) of Spain’s GDP in 2016.7

The crisis could even hamper a robust recovery in the EU’s fourth largest economy. Spain’s GDP expanded by 3.2% in each of the past two years and is expected to grow around 2.8% in 2017.8 However, the Spanish government has cut its forecast for 2018 GDP growth from 2.6% to 2.3%, citing the clash with Catalonia.9

The potential for more severe economic damage for Spain may depend on how punitive measures are carried out and the degree of resistance by Catalan leaders and citizens.

Brexit Uncertainty

As the U.K. prepares to leave the EU, a weaker pound, rising inflation, and a slowdown in consumer spending have taken a toll on the U.K. economy. In the third quarter of 2017, U.K. GDP annual growth slowed to 1.5%, down from 1.8% in the first quarter.10

Brexit terms are not expected to be finalized until shortly before the deadline in March 2019, and the possibility of “no deal” or a “disorderly Brexit” is still a concern. In late October, Prime Minister Theresa May dashed hopes that a transitional trade pact (intended to help businesses plan for the two-year period beyond the exit date) will be forged early in 2018.11

EU on the Mend

A major concern surrounding both of these events is the possibility of contagion — that dissatisfied factions in other EU nations might be inspired to follow suit. But the region has made its way through a challenging decade with debt crises, high unemployment, and two economic downturns. In fact, the EU economy has been on a promising streak since mid-2013, with the pace of GDP growth picking up to 2.3% in the second quarter of 2017.12

  • 1, 3, 9, 11)  Bloomberg.com, October 17 & 24, 2017
  •  2) The New York Times, September 26, 2017
  • 4) The Wall Street Journal, October 27, 2017
  • 5) LA Times, October 19, 2017
  • 6-8) CNN,  October 20 & 21, 2017
  • 10) Office for National Statistics, October 25, 2017
  • 12) Eurostat, August 2017

 Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2017.

By the Numbers

DEDUCTIONS – The House Ways and Means Committee released its initial design of tax reform last Thursday 11/02/17. The bill, officially HR # 1 and called the “Tax Cuts and Jobs Act” (TCJA), eliminates the deductibility of state and local taxes and sales taxes, but retains the deductibility of property taxes up to a maximum of $10,000. TCJA would maintain the mortgage interest deduction for homeowners, but limit the deduction for new mortgages on debt up to $500,000 for homes purchased after 11/02/17 (source: TCJA). Michael A. Higley, BTN 11-06-2017

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These are the opinions of Larry Lof and Stephanie Mayoral and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Past performance is not indicative of future results. Due to our compliance review process, delayed dissemination of this commentary occurs. The S&P 500 is an index of stocks compiled by Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. The index includes a representative sample of 500 leading companies in leading industries of the U.S. economy. Indices mentioned are unmanaged and cannot be invested into directly.  Technical analysis represents an observation of past performance and trend, and past performance and trend are no guarantee of future performance, price, or trend. The price movements within capital markets cannot be guaranteed and always remain uncertain. The allocation discussed herein is not designed based on the individual needs of any one specific client or investor. In other words, it is not a customized strategy designed on the specific financial circumstances of the client. Please consult an advisor to discuss your individual situation before making any investments decision. Investing in securities involves risk of loss. Further, depending on the different types of investments, there may be varying degrees of risk including loss of original principal.

 

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