The Markets – U.S. equities ended the month of July up a bit with a monthly gain of 1.93% setting at year-to-date gains of 10.34% as measured by the S&P 500 Index.
Washington – The White House- let’s just say the culture is chaotic. President Trump’s list of former advisors continues to grow. To date, the folks who are no longer there; Stephen Bannon, Reince Priebus, Anthony Scaramucci, Sean Spicer, Sebastian Gorka, Sebastian Kennedy, Sally Yates, Michael Flynn, Preet Bharara, Angella Reid, Craig Deere, James Comey, Michael Dubke, and Michael Short, among others. We recognize President Trump was elected to “drain the swamp,” but we didn’t realize he was going to have to drain his own swamp first.
The Economy –2017 continues to be a decent year. The next challenge on the horizon is addressing the debt ceiling. The Congressional Budget Office has issued a warning by narrowing its projections for when Treasury might run short on money, to the first half of October. This narrowing of the range for possible dates for the so-called “x date” puts pressure on Congress to raise the debt ceiling so the U.S. Government can pay its bills on time. Should they fail to raise the debt ceiling and cause a shutdown of the government, the markets will be volatile.
Headlines- Since we first mentioned that we remain very concerned about North Korea and Syria, North Korea has on several occasions tested ICBM (nuclear missiles) over the Sea of Japan. This is putting tons of pressure on the Trump administration to create a strategy to address North Korea. To date, President Trump has not imposed the most severe sanctions through the use of the U.S. banking system; we look for that to happen soon. Will it work? It worked in getting Iran to the table but we have no illusion about North Korea. Kim Jong-un has clearly stated he will not negotiate and will “never, ever, give up his nuclear capabilities.” Time will tell.
More about the markets
In May we mentioned a lower or flatter yield curve usually indicates that the bond market is less optimistic about the economy. Considering that, proper asset allocation is more important now than it has been for quite some time. Proper allocation means you will never capture 100% of the upside of the market due to risk control measures. These same measures, however, should also manage the market’s downside so that investors do not capture 100% of the downside of the market either. In general, bonds only capture about 1/3 of the downside of the equity market, and sometimes are positive if the equity markets turn negative. In a properly designed portfolio, bonds can be a necessary shock absorber. High fliers like Facebook and Tesla tend to take the biggest dip in the event of market corrections, while value type stocks are generally tamer. They may pull back, but they tend to have about 2/3 of the downside that market leaders exhibit.
The election of President Trump began the transition from monetary policy to fiscal policy and is now in full swing across the globe. That means the artificial stimulus from the Obama years is gone and volatility should begin to creep back into the market. Downside capture ratio is more important than it has been since 2009.
As investors the most difficult thing to manage is upside capture vs. downside capture. If we go all in, we get 100% of the upside, but also 100% of downside. If we have a more tactical allocation designed to mitigate risk, we give up some of the upside. The key is to capture as much of the upside as possible and when the downside happens trust the process, don’t over react, and over time, you win.
Book recommendation: The Art of Thinking Clearly; Rolf Dobelli.
Have a question? Let me know! Email me at kcompton@wsmtexas.com.