Trick or Treat: Trump Tariff Trade & Treasuries

Thank goodness for stock market volatility, finally, sheesh!

Finally, we are getting a boost on the investing process!

These last couple of years have been crazy hard for investors, true investors. The markets have made the cost of taking ownership in businesses go higher and higher, sometimes crazily so. We had a small break on this pressure in February and we are getting the same kind of break right now. Hopefully it will be a bigger drop on the markets than that lame one in February.

As a reminder, your investments will go down for a bit (in case you haven’t noticed)

But we want and need a few good ‘market crashes’ through the course of your investment lifespan. Without the market crash, then the investment teams we have hired are unable to invest our cash while the businesses they have researched are available at a good price.

… Without the market crash, then the investment teams we have hired are unable to invest our cash while the businesses they have researched are available at a good price.

Right?

Now what a ‘good price’ means different things to different management teams and we won’t know who is going to know the truly GOOD price til a year or two from now (ask me about October 2018 in June 2020) So because we don’t know who of the teams is going to get it the most right, we have hired 4-5 teams for your investments. This means we have 4-5 teams striving hard to make sure you have the cash we have helped you define you need for all your future plans and schemes, hobbies, needs and goals.

Reminders

After nearly 30 years (yikes!) of working as a planner and advisor, I have to admit I love negative stock market events more than positive events for a few reasons:

1.      Selfishly, it makes me look good. People who thought investing was easy and mindless are being shown the cold dawn of reality after the long bull market party. During market corrections, we review what the managers are saying about what is happening AND how they are responding to it. We have approx. twenty teams we work with consistently, so we gather information from each of them. We then make sure each team is ‘behaving’ as expected, raising cash or maybe investing cash, adding to positions, essentially doing what they said they would do during a correction.

2.      Related, it helps me acid test the teams we are working with to make sure they are not ‘just talk.’ We want to see their investment philosophy being put to the test, we want to see the discipline they have around that philosophy.

3.      Importantly, it makes the investments perform better going forward. And that is because for most of the teams we work with, especially after a long bull market, they have some chunk of cash sitting on the sidelines waiting to be invested. What has held them back was simply the companies they wanted to be a part of simply were too expensive to invest in. A correction or -even better- a bear market often brings the price of that company down to something the manager feels is more reasonable.

  • In addition, we amplify that benefit by using strategic asset allocation. This means we have been -over the past few years- skimming equity assets that have been out-performing and plopping them into bonds and cash so now we have assets we can invest the other way, IF the strategic asset allocation needs it.

4.      Remember the key investment is the company, NOT the stock. The Stock Market is simply, literally the place you go to take ownership in businesses you think -or managers you have hired think- are well run. It’s the sticker on the car, not the car.

5.      Most clients are much more interested in talking to me. People remember suddenly that they can be happy with an 8% return rather than being annoyed making ‘only’ 18%. These current sort of scary headlines allows me to ‘gut-check’ clients to make sure they are as aggressive as they were trying to tell me they were. To quote the philosopher Ethan Tremblay (Zach Galifianakis in “Due Date”)  https://youtu.be/1JX57xpAikY  Of course, everyone ‘is comfortable with volatility’ when its only volatile UP. But if you are too nervous to deposit more money to a portfolio after it has dropped in value, then you are not as much of a risk-taker as you pretended you were and, AFTER things recover, you need to divest yourself of that aggressive portfolio and find something much more conservative to invest in going forward.

6.   It is relatively harmless because the only person who is affected immediately is myself.

  • For those who are investing for thirty years from now, what happens over the next couple of months will not even be remembered, let alone derail anything.
  • For those having their investments paying them an income right now remember two things
  1. You don’t need all your money this minute, you only need your regular income, the rest can stay invested and has the time to recover if they have dropped in value recently.
  2. When we set up your retirement income strategy the projection INCLUDED some time when the markets were crashing, I KNEW this was going to happen which is why I was using such stingy return projections when running it.
  • The key point for both groups is to remember that even if your investments have dropped in value, they are not going to stay down forever. The only way drops in value become permanent loss is if you choose to make it that.

So, to extend what I said in point 2 above, here is some summarized commentary from some the management teams we have chosen:

Invesco What drove the sell-off? By Kristina Hooper

 “Stocks began losing ground last week as the yield on the 10-year U.S. Treasury spiked, helped by comments from U.S. Federal Reserve (Fed) Chair Jay Powell, who suggested that the Fed could raise rates significantly before finishing its rate hike cycle. Also placing downward pressure on Treasury prices has been balance sheet normalization as well as higher debt issuance as a result of the U.S. government running a larger deficit.” … “Less than a month ago, the yield on the 10-year was 2.991% but since then it has risen rapidly, rising above 3.2% in the past week.”

…”However, I also believe there is another reason for the sell-off: the growing trade wars… the International Monetary Fund (IMF) downwardly revised its estimates for global growth, as well as growth for China and the U.S., as a result of the escalation in trade tensions:

  • The IMF projects that long-term gross domestic product (GDP) for the U.S. and China will each decline 0.3% as a result of all the tariffs implemented as of September 2018.
  • It expects long-term U.S. GDP to decline 0.5% and long-term China GDP to decline 0.55% if the U.S. imposes its threatened 25% tariff on an additional $267 billion in Chinese goods, and China retaliates.
  • In addition, it expects long-term U.S. GDP to decline 0.9% and long-term China GDP to decline 0.6% if the U.S. imposes its threatened 25% tariffs on cars and parts, and then trading partners retaliate.

…In addition, companies are beginning to report that tariffs are impacting their businesses. On Wednesday, U.S.-based industrial supply company Fastenal reporting earnings and discussed the headwinds being created by the trade conflict, in particular sharing that the most recent tariffs are “directly impacting the North American supply chain for our customers.” This disruption of global supply chains has been a major concern for economists and strategists. As the Cato Institute explained in a commentary earlier this year, “Whereas in the 20th century, most of a company’s production and assembly took place in one location, often under one roof, the factory floor has since broken through those walls and now spans borders and oceans. Taxing imports today is akin to erecting a wall through the center of that 20th century assembly line, impeding production and raising costs in similar fashion. That helps explain the preponderance of opposition among U.S. manufacturers to Trump’s trade tack. U.S. tariffs raise their costs, and the resulting retaliation from foreign governments will reduce their export revenues, squeezing profits from both ends.”

See also:

Tariffs: Examining the economic and capital market consequences

Five issues rattling global markets

Paul Musson & crew, Ivy Funds

Reliably, Musson and the ivy team are not distressed nor even impressed by the current correction, they just want MORE correction… In a recent commentary they said that yes there was too much debt, corporate and government, in the system and the recent increase of rates simply reminded investors of that. The correction -so far- has done nothing to prompt them to invest any of the cash they have built up in the Foreign Equity and other funds. Most things are still just too expensive. Thus they think the current drop is merely a ‘good start.’ They have a watch list of stocks to buy just as soon as their “valuations are attractive enough to compensate us for the risk, and not a moment sooner.”

Capital Group-recent commentary

“U.S. equities may have been due for a pullback, but part of the answer lies with the bond market. The rapid rise in rates in recent weeks was the immediate trigger. It is not so much the direction that has surprised markets as much as the pace of the bond market reaction… The selloff has been led by declines in the shares of technology companies, including many of the names that consistently drove equity markets to new highs during a nearly decade-long bull market…Technology has risen to become 26% of the S&P 500 index and if you throw in Netflix and Amazon, the weight is closer to 30%. These companies have had an outsized effect on market indexes – in both directions. Program trading has likely contributed to sharper moves in markets, leading to higher volatility…Also keep in mind that the technology sector gained 22% year-to-date and soared more than 600% since the end of the last bear market…” 

Here is the Capital Group link

I also found this an interesting, obvious but heretofore overlooked point by their economist Jared Franz. “By some estimates, tax cuts have boosted earnings-per-share growth by as much as 50% in 2018,” Franz says. “Therefore, earnings could decelerate in 2019, and the market is beginning to price that in.”

Mackenzie CIO, Tony Elavia

Tony believes the currently correction is similar to February this year (or the Taper Tantrum in 2013 etc) in that it was triggered by anticipation of rising rates rather than any significant economic event. He does not think the trade issues are a factor. However, he DOES recognize that interest rate rises are often volatile and the reactions are unsteady.

He doesn’t have big concerns because of the relatively strong economic growth happening and the continued earnings growth with only a little bit of momentum lost.

Alex Bellefleur-Chief Economist Mackenzie

The current shift in bond yields is akin to a regime change, since several asset classes were priced under the assumption of lower-for-longer interest rates. As markets felt confident that the Fed would move only slowly and gradually and that policy would remain accommodative, valuations on several assets – such as, for example, U.S. technology stocks – reached high levels. This assumption is currently being put to test, as the Fed appears keen to increase interest rates faster than was initially expected. China is focused on de-risking the financial system, getting banks to re-capitalize so that will slow growth going forward. The US is going to raise rates but has communicated that clearly and, given the $18 TRILLION in government debt floating out there, is unlikely to raise rates more than what they have discussed. Remember a 0.25% increase of interest rates would mean an extra 45Billion in interest payments per year…!

Fidelity Investments

Mark Schmehl (Portfolio Manager, Fidelity Special Situations Fund, Global Innovators Class & Canadian Growth Company Fund) remains relaxed despite the recent hammering of his information technology stocks so is taking advantage of the increased volatility to add to his top ideas.

Will Danoff (Portfolio Manager, Fidelity Insights Class) believes that going forward earnings growth in the U.S. continues to look attractive and he does not believe that the economic cycle will be coming to an end over the next few quarters. The current events are merely ‘buying opportunities’

QV

“… Historically, tightening in the monetary landscape has been a precursor to more challenging periods for equity investors. Should there be any deviation to this gradual rate tightening cycle, we’d expect considerable volatility…. We are not investing in areas of excessive optimism, but rather in areas of uncertainty.”

Dina DeGeer of Bluewater

She saw that is was chaotic these last couple of weeks but reminded us that beyond the spike in 10yr Treasury yields, it also triggered some of the ‘quant’ driven automatic trading strategies to also sell off, artificially decreasing prices for some securities. However, she and her team see there being more global growth ahead so have invested more in some businesses they like.

Please contact us if this summary triggers any questions.

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