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CEO Report: Third Quarter

November 15th, 2016
By Jeff Petersen, CEO

being said, he would have found the latest election “interesting”, which just so happens to be the only word I posted on my personal Facebook page on election night (or throughout the election season). I miss our coffee conversations, which were always intellectually stimulating and civil, regardless of each other’s positions. I think both of us came away with new insights as a result, and it also was great father/son quality time.


We have just completed one of the most volatile and fiercely contested presidential races in recent history (one only needs to observe the tone of emotions on Facebook and Twitter following the election). With the election over, what are the financial implications for clients of Petersen Hastings? Watching the election results unfold on election night and knowing from experience that investors do not like uncertainty, the Petersen Hastings Team’s attention turned to the U.S. stock market where futures prices overnight were already down 5%. We began preparations for rebalancing client portfolios the following morning to take advantage of the domestic and foreign market fear that began to take hold once Donald Trump became a possible winner. Remember that greed and fear are both emotionally driven and are one of the worst enemies of investors. Rebalancing was not needed since clearer heads prevailed by mid morning with the strongest post election stock market response since George W. Bush was re-elected president.  The Standard and Poor’s 500 index increased by 1.1%. Going forward, investors should be prepared for both positive and negative volatility over the next several months since there is still much uncertainty regarding the policies for the next presidential term. Petersen Hastings portfolios are highly diversified, both domestically and globally, to hedge against these types of uncertain outcomes and market events. For taxable accounts, our client portfolios are highly tax-efficient, and we are constantly evaluating rebalancing opportunities against the impact of realizing capital gains.


For the first time since 2009, one political party will control both the Presidency and Congress. A recent Forbes article, “How Will This Election Affect the Stock Market”, August 2, 2016, addressed the Standard and Poor’s stock performance between 1961 and 2010 under different political control scenarios. The highest average annual return for the S&P 500 was under a Democrat President/Republican Congress (21.3%) followed by the Presidency and Congress controlled by the same party (12.1%). The scenario of either party in the White House and a divided congress (7.1%) trailed as well as a Republican President/Democrat Congress (4.5%). The article did not differentiate between market performance during years of Democrat or Republican control of the Presidency and Congress.


There are some indications regarding financial impact of the Trump administration from the publication of the “Details and Analysis of the Donald Trump Tax Reform Plan” (Plan), September 2016, by The Tax Foundation. The Plan would decrease both individual and corporate federal taxes, eliminate the Alternative Minimum Tax (AMT), and eliminate the federal estate tax (we still need to consider the effect of state estate taxes in our client financial plans). There is ambiguity in the Plan regarding pass-through business income, whether this income would be taxed at individual ordinary income rates (12%-33%) or at the corporate level (15%). One of the areas both political parties are concerned about involves U.S. companies doing business abroad. Many of these corporations are making business decisions to avoid paying the U.S. federal corporate income tax rate on earnings. The Plan addresses this issue with a Currently Deferred Foreign tax of 10%.


With reduced federal revenue from both individuals and corporations and the expected increase from the growth impact on the economy, The Tax Foundation forecasts a net cost to our government of between $2.6 and $3.9 trillion over the next 10 years. President-elect Trump has not yet provided details regarding funding sources for this shortfall (The Tax Foundation notes the range is due to uncertainty regarding pass-through income being taxed at the individual or corporate level). Should the government allow for even a short period of deficit spending, expect interest rates to continue to rise (post election, interest rates began to increase). Increased inflation and economic growth will both put pressure on the bond market and expect the Federal Reserve to take action to increase short term rates. Please note that Petersen Hastings client portfolios are tilted toward short to intermediate fixed income durations to minimize the impact of rising interest rates.


In summary, regardless of this current period of uncertainty, Petersen Hastings continues to act as a Fiduciary by always putting our clients’ interests first. This is the philosophy Dad always followed from our first day of business in 1962 and still thrives to this day.


Happy Birthday, Dad!



Post Election, what now?


Today would have been Dad’s 85th birthday. He was an ardent supporter of “Statesmanship”, something that has been missing in politics for decades. That