Market Commentary

2016

December 7, 2016

December 2016 Market Commentary

The Trump Effect – On November 8, 2016, the country voted for massive change and a “risk on” trade.

Question:  What does a Trump administration mean for investing?

Answer: We just don’t know yet.

The JCR Reaction to the Election

Perfect.  This is just the type of uncertainty and potential volatility we have been hoping for.

What We Know and What We Don’t Know

  • We expect large infrastructure spending across the United States. This will have a stimulus effect to the economy, but will be costly and will increase the national debt.
  • There has been discussion of large corporate tax decreases. Again, good for the economy in the short term and should have a stimulus effect.
  • We expect a more hawkish Fed.
  • We expect interest rates to increase more rapidly than previously thought.
  • Trump’s new Secretary of the Treasury, Steve Mnuchin, says he wants the government out of Freddie Mac and Fannie Mae. We don’t know what that means exactly, but this will create more uncertainty in the multifamily space and perhaps some opportunities for JCR.

Conclusion:

Our “early” view is that if Trump passes the key points of his agenda the economy will grow strongly over the next two to three years.

Our concern is that a big spending, lower tax and less regulation agenda could lay the ground work for a future recession.  In the short term this might be a great party, but we cannot overlook the “hangover risk”.

In addition, we expect to see interest rates move at a pace not seen in over 10 years.  A 4% 10-Year Treasury during the Trump administration would not be unexpected.

How JCR is Positioning Itself for a Trump Administration

  • As noted, we believe interest rates will go up faster than previously thought. As a result, we believe many who have been complacent about underwriting to low future rates may have a problem.  Thus, we continue to stress our interest rates and cap rates in our underwriting.
  • We believe there may be volatility and dislocations from policies or political actions. This may take six to twelve months to unfold.
  • In the meantime we are focusing on investments with the following characteristics: 1) strong cash flow, 2) low basis, 3) better quality assets, 4) growth markets and 5) experienced sponsors.
  • As the administration roles out its policies, we will find niches of opportunities, as we have done historically.

What is an Investor to Do?

Stock market:  Hard to predict the next move:  New highs are based on growth, tax cuts and economic optimism.

Bond market:  Bonds will most assuredly fall as interest rates rise.

JCR Capital:   Next 6-12 months:  Our focus – hard assets, cash flow, major markets, less interest rate sensitive transactions, simple stories.

Following the first 6-12 months: Take advantage of volatility and potential dislocations that may arise from the Trump presidency.