The Economic Climate Has Changed and How You Should Be Invested
Each money manager and/or investor has a process that helps them determine when, how and how much to invest. The process that I use starts by looking at whether the United States and/or global economy is expanding or contracting.
In other words, I first try to determine whether the global and/or US economic tide is coming in or going out. In a growth-slowing environment, there is more risk than reward in trying to capture the return of the S&P 500. In a growth-growing environment, we want to more closely track the S&P 500 (or similar equity indexes) because that is where the best risk/reward equation is.
If the economic tide is coming in, then I want to be invested in stocks and bonds that act like stocks; if the economic tide is going out, I want to avoid most stocks and invest more heavily in bonds.
Last week I read a book that referred to Donald Trump as the ‘Chaos Candidate’. What we have witnessed in the last two weeks sure fits the definition of chaos:
We have seen contentious nominee hearings.
We have seen Democrats boycott the hearings to delay votes, thus very few votes have occurred for his nominees.
The Republicans at the meeting in Philadelphia seem to be singing the same establishment tune they have been for months/years. (and that has resulted in low approval ratings)
Now we have a Supreme Court nominee where President Trump is already suggesting using the ‘nuclear option’ to get Gorsuch appointed. Doing so could possibly change the threshold of all future Supreme Court nominations.
Jeff’s Weekly Stock Market Commentary: Global Slowdown
Just last December, Federal Reserve Chairwoman, Janet Yellen announced that they were raising interest rates by 25 basis points because the economy was doing well. She also telegraphed (through their ‘dot plot’) that there would be additional 25 basis point increases at each of their meetings over the next two years. The market didn’t like that and bond yields actually went down on the news (making those of us invested in UST’s some money); and the stock market dropped roughly 12% between the announcement and February 11th.
Last Wednesday, the Fed blinked. They decided that the economy wasn’t strong enough to sustain another 25 basis point increase right now. Moreover, they (in the updated ‘dot plot’) signaled that the trajectory of any increases in the future would be slower and longer.
The stock market rallied on the Fed news of no interest rateon Wednesday. The stock market has been rebounding the last month ‘off the lows’ set on February 11th. Even after surging for over 3 weeks though, it is only back to where it was at the beginning of the year.
The S&P 500 hit an all-time high in May of 2015 at 2130. It has been downhill since then with a free-fall in the index during the middle of August where it slid to 1867. Many investors were shocked at the 12% plunge but were relieved that the markets recovered over the next two months—or did they? On January 20th, 2016 the S&P 500 was back down to 1860 and it is becoming obvious to even the most bullish investors that we may not recover for quite a while.