Communications with Friends & Clients
In the wake of recent market volatility, I sent out a commentary to clients yesterday. Here's what I had to say...
Market & Economic Commentary
Clients & Friends,
I wanted to take a few minutes and reach out to you this afternoon and discuss markets, the economy and geopolitics.
We’ve had some volatility enter the markets the last few days. So far this week, the S&P 500 is down about 1.57%. Overall, however, year to date the index is up 11.64%. So relatively speaking, the added volatility is not something we’re overly concerned about when viewed from this perspective.
The bond markets have been surprisingly robust – especially when you consider the Fed’s effort to raise rates should have a cooling effect on bond prices. Bonds were up 0.12% today and up 2.74% year to date. This asset class becomes more important as stocks become more volatile and bonds serve as a bit of a buffer in our portfolios.
The US dollar has dropped in value of late. Theoretically, this should be a plus for US-based companies as It makes US products and services cheaper internationally. It’s too soon to tell what kind of effect it will have.
Internationally, we continue to believe that there are several investment opportunities. Many countries have not had the kind of run-up that US markets have had. We believe there is a value proposition here so long as risk is balanced.
From an economic perspective, we continue to see mostly positive indicators. Unemployment continues to be at very low levels while corporate earnings this quarter have continued to be stellar. This increase in earnings has been a primary driver of the markets hitting all-time highs.
One of the risks we currently have with the economy and market is emotional reactions versus economic fundamentals. There is a belief that because the markets and economy have been going so strong for so long, that we’re due for a break – this is emotional. Fear builds up because our psyche says that the progress simply can’t continue. Right now, however, the basic fundamentals actually support the markets at these levels.
But it all depends on…
Geopolitics. Unless you’ve been off the grid for the past few days, you probably have seen the war of words going on between President Trump and the Leader of North Korea, Kim Jong Un. This is having a serious cooling effect on global markets, and it is one of the primary reasons for the short-term volatility we’re experiencing.
The reality is that cooler-heads must prevail. It is ridiculous to think that we’re going to start lobbing nuclear warheads across the Pacific at one another. Nobody will win this game as its currently played. Diplomacy needs to be stressed, and it needs to come from someone other than the US or North Korea. A third-party international leader needs to step up and be just that: a leader.
This missile-waving puts at risk our nearly decade-long, global economic growth streak. It can and will have a fundamentally negative impact on the economy. This is not just emotional but concrete.
So, I am continuing to keep a very close eye on the news, markets and the economy. Earth Equity Advisors has developed a strategy to hedge against increasing market volatility by reducing equity exposure and increasing derivatives that are designed to take advantage of the volatility and not correlate with the markets. I’ll implement this strategy if and when necessary. For now, I’m just watching.
We all lived through the market drop in 2000 and the Great Recession. What I’ve learned is that prudent, disciplined and timely tactical shifts can make a real difference to portfolios in times of uncertainty – but only when necessary. As I’ve said in the past, I’m comfortable being a bit more conservative with our portfolios – this may limit us on the upside some, but I believe the downside cushion is worth it.