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You are viewing Politics & the Economy

A Different Market Perspective

In light of the market correction that is occurring, I have pulled together some interesting and compelling quotes that help to put it into perspective:

“Yesterday was the third worst point decline for the Dow since 1915. But it was only the 284th worst day [as a percentage].” – Michael Batnick

“On days like today it’s easy to tell the Good Guys from the Bad Guys. The Good Guys are saying reasonable things, reassuring those who look to them for insight. The Bad Guys are squirting lighter fluid on the media bonfire, reveling in the fear of others, mocking the masses.” – Josh Brown

“Worst day in eight months. Eight. Whole. Months. An eternity.” – Blair H duQuesnay

“If you have a solid global asset allocation you could expect similar returns as the S&P 500 but with lower volatility and drawdowns. You can also expect to underperform about half of all years, by a mile (>10%) every 5 years, and easily underperform many, many years in a row.” – Meb Faber

“S&P 500: this is the 23rd correction >5% since the March 2009 low. They all seemed like the end of the world at the time.” – Charlie Bilello

“Minus 4% Dow Jones days are more common than you think. We’ve had on every 82 days on average since 1900.” Michael Batnick

“Since 1928 the S&P 500 has seen 325 days w/losses of 3% or worse. That means it happens roughly 3.5x a year on average.” – Ben Carlson

Keeping Tariffs in Perspective

Recently, I was asked about my thoughts on the tariffs and the impact it may have on a portfolio.  What follows is my response:

“I see this as a giant game of chicken between China and the US.  I see this causing a lot of anxiety and volatility in the market, but I’d imagine that someone is going to “blink”, a deal will be struck and no tariffs will be enacted.    There will always be some issue that is of concern that gets blown out of proportion which leads to an overreaction among investors (thanks to the 24/7 media coverage). It could be the possible government shutdown, conflicts in Ukraine, North Korea, Brexit, elections, or rate hikes.  All of these received the same kind of media attention over the last 3-4 years.

It’s hard to separate ourselves from these kinds of issues because we are so close to them. It’s currently happening around us.  It’s on the news. It’s being discussed around the water cooler.  We are seeing it translate to the performance of our accounts.  And that can be scary.

Ultimately, in working with clients, I take a longer-term view on the markets. How will we look back in five years on the impact of these tariffs if enacted?  I can’t help but believe that it would be a foggy memory for most investors, just like Brexit, the taper tantrum, and the government shutdown.  And you take it out to an extreme example, some investors are starting to forget their fears they had during the last recession because they are seeing their account values grow significantly above the pre-recession values.

So in the grand scheme of things, I don’t see the tariffs as having a material impact on your situation in the long term. “

The Usefulness of Market Outlooks

“Who knows” was my answer when I was recently asked about my own outlook on the markets for 2018.

Over the last few weeks, my inbox has been flooded by dozens if not a hundred market outlooks by prominent research firms, economists, and strategists.  And they are all completely different.  Some see significant stock market appreciation while others see little to no growth. Some see more growth in the US than abroad.  Others see more growth in the foreign markets than in the US.  Some see rising rates to be an issue.  Others do not.  And some even predict a negative year for the stock market. Chances are they are all wrong!

They are interesting to skim through to understand what they believe are the biggest issues to occur in 2018.  But it’s just as fascinating to see what is not included in their outlooks.  There are even some research groups that make a living by reading through old Market Outlooks and calling out all the wrong predictions.

Think back to this time last year.  Trump was just sworn into office and it seemed like everyone was waiting for some kind of market correction to occur.  But it didn’t!  Volatility is now way down.  Markets have shrugged off much of the bad news that has come out in recent months (such as North Korea).  Any market outlook that expressed these kinds of views would have been quickly dismissed if written in early 2017.

It’s a reminder to stay focused on your investment strategy.  There is a lot of noise that distracts investors and all to0 often leads them into making poor investment decisions.

Political Impacts on your Investments

Since Donald Trump was elected in early November, the US stock market has surged to new heights.  We have fielded dozens of phone calls from clients asking how we are viewing this situation.  Below is a summary of our thoughts:

  • We believe this a tortoise vs hare race in terms of investing.  Lots of investors are piling into the market right now as they don’t want to miss this surge.  Or they are seeing unbelievable opportunities.  Caution is being replaced by exuberance for some investors.  This is the first time since the recession of 2008 and 2009, that we are hearing investors feel confident and optimistic in the markets.  This kind of knee-jerk reaction reminds me of the story about the tortoise and the hare, where the hare is overly confident in his abilities while the tortoise remains steady and purposefully in his pursuit. In this case, we will gladly be the tortoise. We will continue our steadfast approach to investing and will not deviate from our process.
  • What’s changed since trump’s election: Trump has continued to tweet his positions and that has been well received by the market.  No policies have been actually implemented, yet the market is pricing itself as though the policies have been implemented.  We all know intuitively that a president can’t just snap his fingers to make things happen.  As Trump hits resistance in implementing his plans, we expect the stock market to overreact to the bad news.  We expect more volatility this year as the market tries to correctly price itself based on the actions and words (and tweets) from an unconventional, and unpredictable leader.
  • Foreign Opportunities: As measured by valuations, the US stock market is expensive to invest in right now.  But when we look oversees, we see stocks on sale.  When the 2008 and 2009 recession occurred, the US stock market came back and has reached new highs, but many of the foreign markets have continued to muddle along over the last few years.  One related item is how the dollar will do relative to other currencies – if the dollar continues to strengthen, it could mute any returns we see abroad.
  • Small Cap Opportunities:  As the US and other countries embrace a more nationalistic attitude, foreign trade will likely be affected.  This means, that large US companies that see a significant profit coming from overseas trading will likely be hurt thanks to tariffs.  On the flip side, smaller US companies that serve mostly customers in the US will likely do better since they will not have to compete as much with foreign companies (bc there goods would be slapped with tariffs coming into the US).

Bottom line:  While we do see some opportunities, we plan to maintain a defensive approach to investing.  We see the current run up in stock prices to be unwarranted and that there will be a reversion to the mean at some point.  The opposite is true when looking abroad – the foreign markets have limped along for too long and we expect a reversion to the mean to occur at some point.

Italy, Again, Still

“……the bad-loan problem is mainly due to a 25 percent plunge in industrial output in the six years through 2014.

Italy’s GDP remains about 8 percent below its pre-crisis peak reached in 2007.” (link)

Back in 2012 and 2013, I wrote that the European common currency, the Euro, would fail. I wrote that a Europe strapped into a common currency designed for political reasons would prove itself to be unworkable for economic reasons. Countries like Italy could not be locked into the same currency as Germany. I wrote that Italy needs its own currency so it can continuously devalue to keep the cost of its goods competitive with those from Germany (devaluing a currency makes everything in a country cheaper for everyone outside of that country). Before the Euro, Italy was able to devalue its currency, the Lira, and thus keep the price of its goods relative to the price of German goods and services. However, the Euro locked Italy and Germany into the same currency. While the cost of Italian goods rose, Germany’s cost held steady. Instead of facilitating trade, Italian industries were outcompeted and hollowed out. Italy began to import more and export less. (Un) Fortunately, because Italy’s currency was now the Euro and devaluation was not possible; banks everywhere were willing to lend Italy money without abandon. While exports (earnings) and their industries declined, the government bloated up with debt/spending to fill the void left by their declining productive sector. Government expansion (and government debt) maintained the illusion of economic activity. The problem was solved (or better, put off) for a while. Government did what government does best; it makes things worse.

Then the European Central Bank (ECB) stepped in and, you guessed it, made things worse. The ECB decided to buy massive amounts of bonds from all the European nations and flood the system with money with the intention of reviving these economies. This has put off the inevitable default of the massive amount of debt Italy found itself in. Of course, this has not worked. Italy has not defaulted, but it’s economy is sick because political forces are strapping it to the death grip of the Euro. In order to compete, Italy must lower its costs. Instead, the current plan is to remain in the Euro and grind down wages, benefits and everything else (austerity). This is not working and will most likely end in a popular revolt. On the other hand, if Italy was to leave the Euro and pursue its own currency, Italy’s new currency, the Lira would devalue. Devaluation would immediately realign relative prices. The cost of Italian goods and services would become cheaper while the costs of creditor nations goods and services such those from Germany would become more dear. Floating currencies adjust to keep countries competitive and thus working without grinding ‘austerity’.

Today, Italy is sick. The economy has not grown in years, government debt has exploded, and the banks are full of defaulted loans. Italians are increasingly holding cash and/or gold because their banks are failing. Non-performing loans are approaching 20% of total gross loans; and under the current European Laws, the Italian government is not allowed to bail out the banks. So many depositors could lose their savings.

Watch Italy. As I wrote about several years back, the Euro is a failed experiment. The partial breakup of the Euro is not the end, it is the beginning. The immediate pain of going back to a devalued Lira will free Italy from past mistakes and reset its economic path to future growth. Currency exits have happened before and devaluations are commonplace. It is inevitable. A devalued Lira will make vacations in this beautiful country a bargain and a flood of tourists will put Italy on a road to recovery.

Republican or Democrat: Historically, Which Party Does a Better Job Growing Your Investments?

Republicans and Democrats each make strong and compelling arguments as to why their approach and strategy will be better than their opponent. The media, think tanks, and experts are constantly making solid arguments for one candidate or the other. And in many cases these arguments and research findings conflict with each other.

Conventional wisdom suggests that a Republican President will do a better job helping businesses grow, which will in turn increase the return on your investments. Yet, the Democrats have released some interesting information that suggest otherwise.

Lots of research supports the idea that the stock market (and your investments) do better when the incumbent party keeps the office. And yet, there seems to be many exceptions to that statistic when one factors in market volatility or look at a wider time frame.

So how do we as investors and voters determine if it’s better to have a Democrat or Republican in the White House when everything appears to be shades of grey?

If there’s no clear research showing that one party is better for the stock market than the other, chances are there is no statistically significant correlation. In other words: The presidential election itself has little bearing on investment performance. And all of these headlines, articles and research we read pushing one candidate over the other may just be marketing fodder.

Here are a few strategies to keep in mind over the next few months:

  • Expect volatility as the election draws near. The markets do not like it when there are looming questions about the future direction of the country. Most likely this volatility is short term and will clear up as investors digest the implications of one president over the other. This will be especially true if the candidates target a particular industry (such as health care or defense)
  • Remember you are a long-term investor. Much of the noise and headlines will not have a long term impact on your investment future.
  • Stay the course with your investment strategy. The candidates, their respective parties, think-tanks, experts, pundits and the media will try very hard to rattle your cage to sway your opinion and to get your vote. They will use fear tactics or they will paint rosy pictures of the future. And unfortunately, many investors will make poor investment choices prior to the election. They will move to cash if they are afraid or they will move into an asset class they believe will soar if their candidate wins.
  • Any significant policy changes will take months to develop and potential a year to roll out.