View from the Chair: Windermere's Market Perspectives (August 2019)

What is happening?

August is traditionally a slow month - as we ease from summer fun back into the routineness of fall. Not this year, at least as it relates to the markets.

In case you’ve tuned out business news for the past week, here is what you’ve missed:

*What goes up is coming back down - last week, the US Federal Reserve lowered the Federal Funds Rate by 25 basis points. Yes, that’s the same benchmark rate that the Fed increased several times last year at a faster than expected rate, leading (in part) to December’s sharp selloff. This recent rate cut was believed to be in response to trade concerns and slowing growth (as lower interest rates should lead to more borrowing and in turn more growth). Markets were tepid in response as they had priced in ongoing rate reductions (which the Fed did not indicate in comments)

*”Tariff Man” strikes - President Trump has given himself this title and he put it to use again as he announced that he would extend tariffs to virtually all remaining Chinese imports not yet subject. Many believe this was in response to China not ramping back up purchase from US ag suppliers/farmers

*China responds in force - Markets woke up Monday (8/5/19) to news that China had devalued its currency (allowing the Yuan to fall below the previously accepted floor of 7 yuan to USD). This sparked an immediate reaction in global markets. China’s central bank said that the currency move was due to economic factors/trade concerns and was not retaliatory. Yet markets clearly viewed it as a sudden increase in trade tension and uncertainty. Why does this devaluation matter so much? As the yuan falls (relative to other currencies, including the USD), it makes Chinese goods cheaper on a relative basis, thereby inherently encouraging other countries to buy from China and discouraging them from buying from other countries, including the US. It was also seen as a extreme tactic, indicating that trade disputes are likely to continue.

*Currency manipulation - President Trump immediately tweeted that China was a currency manipulator and later on Monday, upon reviewing the facts, the US Treasury declared that China was in fact just that. What is required to achieve that label (which is mostly symbolic)? Three factors are considered: (1) country must be known to actively intervene in its currency markets (2) country has a large trade surpius with US and (3) country has a large overall current account surplus. All are true for China

*Not so fast - First thing Tuesday, after the worst day of 2019 for equity markets and treasury yields falling to levels not seen since 2016, China retraced its steps (a bit). China’s Central Bank indicated its desire to keep its currency at a higher level. This statement eased worries that China is intending to use its currency as a weapon in the trade war and markets gained back some of the large decline on Monday

Where does that leave us?

A few truths appear self evident to us:

1) Worthy adversaries - both the US and China are incredibly strong nations with their own unique share of bargaining chips. Much has been debated about who is in a weaker position but it is clear that both are willing to negotiate and stand their ground on behalf of their countries

2) Open negotiations - one has to imagine that before twitter and 24/7 business news, trade negotiations between two world powers such as these would not be dissected and analyzed minute to minute. The media scrutiny and reaction to every back and forth is intense - and should be viewed with extreme caution. A negotiation is just that - a negotiation. It is not (and will not be) an open and shut debate

3) Much at stake - The US has a lot at stake (as does China). But taking an objective view of this, the US does have a trade imbalance with China and has been suffering intellectual property theft for many years. While you may disagree with the tactics (ie: tariffs), the spirit of the issue has recognizable merits

4) Outcome is likely but not on the imminent horizon - It is highly likely that an outcome will be reached. Trump faces a pending election (and while we’d like to think politics don’t play a role, we all know that they do) and China needs to boost its economy and retain growth. A deal will come but we don’t believe it will happen for at least a few months (if not into 2020)

What’s an investor to do?

The time to prepare for a fire is not the day the fire strikes, so to speak. In balanced portfolios, we have been trimming equity weights and building fixed income positions. We’ve also been retaining some cash to add on weakness, such as this, from our “shopping list” of companies as well as skewing equity holdings to larger cap names with a more defensive tilt. And we’ve been ensuring that any liquidity needs are “stored” in cash/fixed income and/or covered by yields.

Best thing you can do is to pause and consider what action you are tempted to take and why. Then give us a call and we can walk thru it together before you do anything. Investors are often most tempted to do the exact wrong thing at the exactly wrong time. Let’s work together to avoid just that.

Invest on - and know you are not in this alone,


View from the Chair: Windermere's Market Perspectives (September 2018)


"Timing is everything"  This age-old saying can be applied to so many areas of our lives - including investing.  Lately, it seems like timing is on top of a lot of investors' minds.  Questions such as: 

  • Is it time to get out of the market? 
  • Is it time to go all in? 
  • Is it time to rotate out of technology stocks? 
  • Isn't it about time for a recession? 
  • If this the longest bull market, surely it should end soon? 

All of these are fair and valid questions but if any of us knew even one of these answers with 100% certainty, we would be financially set for life, having mastered the markets years ago. 

Timing the market is essentially impossible.   So the question is really not if the time is exactly right - but instead if the asset class(es) considered for investment have the highest likelihood of being the best vehicle for the compounding of your wealth for the foreseeable future. 

While watching a recent Warren Buffett interview, I heard him articulate this concept perfectly:

"I can't tell you when to buy stocks, but I can tell you whether to buy stocks"

His point is exceptionally well taken.  While one can never be sure if today is the precise right moment and best price to buy stocks, one can do analysis to evaluate which asset class presents the greatest probability of compounding your wealth over time.

So let's instead look at that question and some factors worth considering in your analysis:

1.) Risk assessment - How do you define risk?  Is it the volatility in price?  The potential for the price to go down from where you bought it?  Or is it permanent loss of capital?  Evaluate what you are afraid of - and then assess whether a given asset class presents more of that risk than you can handle - and more importantly, whether you are being paid to assume that risk (see next)

2.) Evaluate alternatives -   Assess the risk/return relationship for your available options.  In today's environment, you have cash equivalents providing ~1.5% annual returns, US 10 year bonds providing 3% returns, and the broader US equity market providing an nearly 10% YTD return thru August 31st.  Is the incremental return on equities enough to compensate you for the additional risks?

3.) What do you wish to own - Pay attention to what it is you actually own via your investments.  Do you want to own productive assets (ie: one with earnings power, cash flows, innovation, employees, ability to return both dividends and profits to you).  Or, do you wish to own non-productive assets that are priced solely on a formula or by what others are willing to pay you for them.  Equities are shares of productive assets.  Bonds, gold, and currencies are examples of non-productive assets  

4.) Underlying environment - There is unlimited amounts of economic data one can analyze and assess to determine the status of the underlying environment and economy.   While making this assessment, it's critical to consider whether the environment is supportive of your chosen asset class being able to rise in value.  So in the case of equities, does the environment support growth that will drive further sales, ongoing innovation and productivity gains, stable to growing cash flow, etc.  In the case of fixed income, are interest rates likely to rise (potentially hurting principal values but allowing coupons to rise) or fall (with opposite effects)?  In the case of cash, is inflation likely to erode purchasing power driving real returns negative?

As you can see from the above discussion, timing actually isn't everything.  Instead, time IN (the right place) is what matters.

Invest on - and let time do it's job,