Outlook for the Equity and Bond Markets and Interest Rates

Equity Market Outlook

Mark DeVaul: Looking out today, traditional multiples do look a little bit elevated. And, and it's hard to assume that interest rates go down from here. So, I think as we look forward we're not expecting much in terms of multiple expansion. The Fed is raising rates and usually, in that case, we see multiple compression over time. So, it doesn't mean the stock market has to go down dramatically, it just means earnings growth will have to drive the market higher from here. And, I think as we look forward, we're expecting more muted returns, and more volatility in the market over the next few years.

Bond Market Outlook

Gary Cloud: We are nine years into a business expansion and pretty close to the longest one of any other business expansion. But, in reality, we see lots of value here, and the reason is that our rates in the United States are so much higher than the rest of the world. So, we actually see the nine-year high in interest rates for maturities, bond maturities of five years, to be a very, very nice opportunity. We also believe that there are many disinflationary aspects of the economy, the Amazon effect, for example, price transparency, lots of competition, that are really keeping inflation at a much lower pace than what we've seen in most of the last 20 to 30 years. So, we find the bond market to be particularly attractive right now, yields are very high on a global basis, and at nine-year highs, we're very excited about bonds.

Effects of Tax Reform

Mark DeVaul: I think the corporate tax rate is a good thing for companies. One, it makes U.S. companies more competitive globally, with a lower tax rate. Secondly, the names we own in the Fund did have a relatively high effective tax rate coming into this year, so that should come down pretty considerably.

The benefit to shareholders will be likely coming back to them through higher dividend payments, greater share repurchase. We'll probably see some capital spending increase as well, but I think the majority of the benefit will be through dividends and share repurchase.

Outlook for Interest Rates

Gary Cloud: Well, the Federal Reserve has raised interest rates six times in the last just about three years. So, what's happened is that the yield curve, the difference between the two-year yield and the 10-year yield; have flattened or narrowed quite a bit. So, when you have a very flat yield curve and you are longer into a tightening cycle, that's generally pretty close to the end of the Fed raising rates. So, we don't believe that the Fed has another five or six rates heights to go in this cycle. Historically, when the yield curve inverts it brings upon an economic slowdown and possibly a recession. We think the Federal Reserve will be very sensitive to that, and therefore, their projected rate path will be altered, or at least come to a halt for a longer period of time, to allow the rest of the world and the economy to catch up to us.

So, we think the flat yield curve has some interesting opportunities in the portfolio, but we also believe that we're closer to the end of the rate hiking cycle than being in the mid-portion. And that's not a view that many people have today.