Despite uncertainties on the stage of global trade and relations, the main concern for investors remains primarily the activities of the Federal Reserve’s monetary policies together with the tax and fiscal plans of the Administration and Congress. The Fed’s plans have been consistent and transparent. The Fed will continue to gradually raise short-term interest rates and will begin to reduce its vast reserve of bond holdings potentially raising longer-term rates. Higher rates are rarely if ever a positive for markets. The current consensus expectation is for another Fed Funds rate increase in December of this year.

Fiscal policy too has been transparent, but the proposals, all borne of politics, obviously are all over the map. Tax cuts for all means higher deficits. Healthcare stabilization and infrastructure also mean more spending. All talk of balancing a budget, even by the budget hawks has virtually disappeared. All of these proposals are positive for the economy, and hence, the markets. The catch is that the Republican mantra of “Republican Only” legislation together with an intransigent Republican Right is clearly not producing results. Interestingly, the Democrats share the essence of these goals and there is a better than even chance that the Administration, desperate for legislative success will reach out to the Democrats for the legislative progress that has been waiting there all along.

What does it all mean for the markets? Deficits always mean more spending, which means more money in circulation, which markets love. The Fed will certainly be happy hoping that the deficits will finally begin to produce some inflation that for over a decade has been far below their targets. That lack of inflation has crippled their policy tools by enforcing zero rates over the same period. In the near future, we will discuss why on-going deficits and growing federal debt have not produced meaningful inflation and why they also are not likely a long-term economic concern.

We continue to remain cautious and constantly vigilant. We are always monitoring developments for indications that would call for us to modify our outlook.

Very Best Regards,

Joseph L. Toronto, CFA

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