As I suggested in my last article, negative market volatility often occurs when there is uncertainty. There are several things to learn in the Brexit vote, which was a surprise to most. Collective opinions like a poll is only a representation of those who responded to the question posed. My point here is to stay in the game it is necessary to be agile as opposed to being stuck on what you hear in the news or read in the internet.
As Adam O’Dell at Dent Research put it, “The surprise Brexit results unleashed a torrent of uncertainty and volatility in global financial markets. Some of that will be temporary, but much of it will linger through the summer, and potentially into the fall as we near the US Presidential election. Brexit was Europe’s wild card. Trump is our own. And so any investor expecting a smooth ride between now and December is naïve, at best.”
Consider Brexit your Financial and Political Wake-Up Call.
"Europe is ready to start the divorce process, even today, without any enthusiasm, as you can imagine," said summit host, EU President Donald Tusk, on June 28, 2016, according to Yahoo Finance. It was also noted that “outside the Council room, markets were still in upheaval as they sought to recover from the unexpected exit vote, which will rob the EU of its biggest military power, its second economy and a diplomatic giant.”
As we look at the current global economy one cannot help but observe several nagging developments. We have currency devaluations, some countries with negative interest rate policies on top of slow-to-no economic growth in developed and developing economies. Many experienced investors are having trouble seeing what to do now. With continued turmoil and potential fallout, where is your money safe? If you have been reading what I’ve been writing you won’t be surprised that I do not offer you any traditional opinions.
Cash is Always King but is Gold the Move?
Just as when you go on vacation there are different ways to get from where you are to where you want to go, it is the same when it comes to investing. Only time will tell after the fact which may have been a better answer than the route taken. But sometimes the easy answers can turn out to be the wrong answers. If it is the case that you are taking income from your investments now or plan to do so in the near future, I am not going to suggest to you that you stay complacent as you repeat the mantras, “stocks for the long haul” or “hold & hope” or “sit and take it.” Further, I would no more recommend that you put your life savings in gold than I would encourage you to put all of your money under the mattress.
With interest rates where they are today, even in a low inflation environment, holding onto cash will not make you wealthy. Keep in mind that central banks can devalue a currency by simply printing more money. Cash can, however, be a temporary position looking for opportunity. This can give investors much needed flexibility when times are volatile. Crises can present rare, if ever, investment opportunities that you can take advantage of, if you have cash or liquid assets at your disposal.
On this side of the pond, the market doesn’t seem to be fixated on a US rate hike. It’s more focused on corporate earnings. “The US economy is in a late-cycle phase with recent economic activity indicators pointing to a mixed picture,” writes Forbes contributor Kenneth Rapoza on June 23, 2016. Rapoza went on to say, “The Fed’s Monetary Policy Report that was presented to Congress also showed worries about an overheated US equity market, fueled largely by the Fed’s QE programs.” This chart representing the sales of companies including Nike, Diamler AG, LVMH-Moet Vuitton, BMW, Pernod-Ricard, Carnival, Tesla Motors and VF Corp, for example, is a telling indicator.
The S&P 500 Global Luxury Index is comprised of 80 of the largest publicly-traded companies engaged in the production or distribution of luxury goods or the provision of luxury services that meet specific investibility requirements.
On February 26, 2016, Fortune Magazine reported that Restoration Hardware’s “shares sank earlier this week after the company announced preliminary fourth-quarter results that fell well short of investor expectations.” CEO Gary Friedman listed several factors for the retailer’s shortfall; the oil bust hurt sales in Texas and Canada and a crazy stock market hindered demand.” I don’t think Mr. Friedman got the memo. It appears to me that consumers for a host of reasons just aren’t buying stuff the way they used to. This an ongoing trend.
Here’s another indicator to study. According to the Wall Street Journal on June 27, 2016, “restaurant visit growth has completely stalled in the last 3 months, signaling that consumers, jittery over economic uncertainties, are retrenching.” When fast-food growth comes to a halt, “that’s a red flag because it’s been an area of growth and it’s 80% of the industry,” says Bonnie Riggs at market research firm NPD Group Inc.
What to Do Now?
It may be nearly impossible to employ a single perfect strategy that can hold up during difficult times. It is my belief that by using several complimentary strategies working together over the long term can produce better outcomes.
1. Core Markets provide broad market exposure to allow you to participate in domestic or global economies.
2. Tactical Strategies can help investors attempt to enhance returns through greater exposure to risk assets or to limit extreme losses in challenging markets.
3. Diversifying Strategies can help smooth overall portfolio performance when you need it most (look for alternatives to cash, bonds, and stocks).
4. Look at your accounts to see where you can apply active tactical management strategies that may limit downside risk.
5. Establish a stop-loss if you are a do-it-yourselfer. If you have hired someone to do the work for you, ask your team for their market loss goal. One manager I like has a goal of limiting losses to 5% or less every quarter. And a track record to back it up. Now that’s impressive.
The opinions voiced in this article are for general information only. They are not intended to provide specific advice or recommendations for any individual and do not constitute an endorsement by NPC. To determine which investments may be appropriate for you, consult with your financial professional. Please remember that investment decisions should be based on an individual’s goals, time horizon, and tolerance for risk. Investing involves risk, and there are no guarantees that any managed portfolio will meet its intended objective. Neither asset allocation nor diversification can ensure a profit or prevention of loss in times of declining values.
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