The steady diet of headlines pouring out of the Trump administration has been unsettling for most Americans, regardless of where they sit on the political spectrum.
We know equity markets loathe heightened uncertainty. What is happening in Washington is generating an enormous amount of political uncertainty. Yes, the word “impeachment” has even been bandied about in conventional circles. It was responsible for a one-day sell-off last month that cost the Dow 373 points (St. Louis Federal Reserve).
Blame the knee-jerk reaction on allegations President Trump asked then FBI Director James Comey to end an investigation of former National Security Advisor Michael Flynn. There hadn’t been much downside action in the major indexes recently, so talk of impeachment jarred the short-term crowd.
But, political as well as international uncertainty has yet to generate economic uncertainty. Hence, and this is important, we have seen little downside in stocks. It really is about the economy.
Given the comparisons to Watergate, let’s take a high-level look at what was happening economically in the early 1970s and compare it to today.
Table 1: Then vs. Now
Inflation rose to double-digit levels, peaking at over 12%
Inflation remains low
Interest rates were spiking higher; prime loan rate hit 12%
Interest rates remain low
OPEC oil embargo roils economy, oil prices rise four-fold
A glut of oil exists today and prices are well below levels of recent years
The unemployment rate jumped as the economy fell into a steep recession
Employment is rising, the unemployment rate is at a cyclical low, and the economy is expanding
Source: St. Louis Federal Reserve, U.S. State Dept.
As Table 1 illustrates, the fundamentals are radically different today.
Beyond the brief synopsis I provided above, I’ll stay out of the political weeds and let you form your own opinions. Stepping briefly into the political arena feels like I’ve stepped into a minefield! But I felt it was important to provide some context in relation to the markets.
As a seasoned Certified Financial Planner™ professional, I am happy to entertain any questions you may have about your portfolio, your financial plan, and how I believe various events of the day may impact your investments. It's completely understandable how the distractions can make it hard for you to develop and commit to your financial roadmap.
A couple of months ago, I touched on the failure by the House to pass a so-called “repeal and replace” for Obamacare. It had little impact on shares. Like it or not, the House finally passed a health care bill last month, and it did little to boost shares.
The crown jewel for investors, however, has always been a cut in the corporate tax rate. Well, what seemed like a certainty immediately following the election has become murky. In fact, a late May article in the Wall Street Journal entitled “GOP’s Proposed Tax Changes Are No Match for Status Quo--Republican lawmakers’ boldest ideas for changes are on political life support…,” summed up the dilemma the party is facing.
We were told by the pundits that political gridlock and any unraveling of Trump’s tax cut and infrastructure agenda would pound stocks. It’s not yet unraveled but bold economic changes from Washington are at risk.
Yet, stocks are near all-time highs.
Why? I think what we are beginning to see is the passing of the baton. An investor-friendly agenda in the post-election climate that fueled market gains has been replaced by stronger economic fundamentals.
S&P 500 profits in Q1 came in at the fastest pace since Q3 2011, according to Thomson Reuters. And forecasts for the year have been relatively upbeat.
Simply put, the fundamentals “trump” the negative headlines, whether those headlines originate in the U.S. or overseas.
The longer-term focus of the markets has always been the economic fundamentals. I believe that focus has not changed.
Unless the economy is significantly impacted, unexpected and alarming events may create short-term volatility, but they rarely create long-lasting impact.
Shedding light on a confusing maze of options–financial literacy
I recently came across a definition of financial literacy in Wikipedia that I believe sums up the term well. I’ll paraphrase: “It refers to the set of skills and knowledge that allows an individual to make informed and effective decisions with all of their financial resources.”
How do you manage money? How does one come up with financial goals and a plan to reach those financial goals? How do we make effective decisions with our financial resources?
These are easy questions that don’t command easy answers. You see, the financial arena is much more complex than it was 50 years ago. There is a downside to the proliferation of choices we have today. It adds a layer of complexity and creates confusion. Many don’t know where to begin. Many fall into paralysis by analysis.
One of my goals in my practice is to educate the investor. I cover various topics in my client meetings, but I’ve learned that some folks feel uncomfortable about asking questions they perceive as too simple. Don’t we all?
Let me say this–there isn’t a bad question. Establishing a comfort level with your financial roadmap is very important.
While the financial plans I advocate encompass basic principles, I do not take a cookie-cutter approach. Instead, I tailor my advice to your unique situation.
So, let’s review some of the assets we may recommend and briefly explain how they work.
So, let’s begin with something simple–stocks.
Investopedia defines a stock as “a type of security that signifies ownership in a corporation and represents a claim on part of the corporation’s assets and earnings.” If the company pays a dividend, it provides you with income.
Stocks can rise and fall in value.
Next, bonds. When you purchase a bond, you are lending an entity money, usually the government or a corporation. For your cash, you will be paid interest, usually every six months.
The yield you receive is based on the credit risk of the firm. Bonds can rise or fall in value but are typically much less volatile than stocks.
The worst-case scenario with stocks or bonds–a company goes bankrupt and you lose your entire investment.
That’s one reason why we highly recommend you diversify. You are not putting all your eggs in one basket. Investing doesn’t eliminate risk, but it does spread out the risk, enabling you to earn a return that has historically exceeded the return on a bank savings account.
Let’s look at three other investment vehicles.
One quick way to diversify is to choose what’s called a mutual fund or an exchange-traded fund (ETF).
Simply put, a mutual fund is generally actively managed by a professional or team who purchases a diversified portfolio of stocks and/or bonds. There are thousands of mutual funds to choose from, and I carefully select ones that I believe are best suited for your portfolio.
More recently, Exchange Traded Finds ("ETFs") have become quite popular. ETFs are investments that combine the ease and lower costs of index mutual funds with the flexibility of individual stock ownership. ETFs generally track an index or basket of assets and trade like common stock on a stock exchange. Some are designed to mimic broad areas of the market to instantly diversify, such as the S&P 500 Index. Others mimic an index that’s industry-specific, such as banking, health care, energy, or housing.
Both securities can rise or fall in value.
Let’s look at one more–the REIT, or real estate investment trust. A REIT is designed to produce income by investing in real estate. In many ways, it has characteristics that are similar to both a mutual fund and an ETF.
Like a good mutual fund, a publicly traded REIT allows one to instantly diversify among a broad portfolio of income-producing properties that would be inaccessible to the small investor. Unlike real estate, a publicly traded REIT is liquid.
Except under extraordinary circumstances, it can be quickly turned into cash. Like an ETF or mutual fund, it may rise or fall in value.
Space limits prevent a much more detailed survey of financial planning topics. Your needs may bend toward estate planning, retirement-income planning, insurance, charitable giving, college savings, and other areas. In fact, I dedicated substantial space to retirement-income planning and college savings in recent newsletters.
Every situation is unique, but there are fundamental financial principles that should guide your financial roadmap.
Assisting my clients in pursuit of their financial goals and shedding light on financial complexities provides me with an enormous amount of satisfaction. Financial literacy is just one of the avenues that can help place you on the road to reaching your goals and dreams.
My office is just an email or phone call away should you have any questions. Again, there are no bad questions or substitute for being informed.