The GPS is Broken | Market Insights
Summer is closing in fast and with that comes the time-honored tradition of the family vacation. While some will choose to fly to their destination, others will follow in the footsteps of Clark W. Griswold in the family truckster. The decision to drive to a destination adds an extra layer of logistics to planning your trip, but one major hurdle has been made significantly easier with the advancement of technology: directions. Twenty years ago, you would need to get out a paper map and figure out the most efficient way to get to your destination, hoping that the path you chose didn’t have significant construction or a road closure. Also, with map in hand, you could always find an alternate route around any trouble. Today, if you have a smartphone and an address you will be routed to your destination, turn-by-turn, in the most efficient way possible. All this is updated in real time and if you have kids, you will be able to give an accurate answer to the recurring question, “When are we going to be there?”
But let’s say you are halfway through your trip and the nice lady on the GPS chimes in and tells you she is “re-routing” you because there is trouble ahead. No big deal, just follow the directions. But suddenly, she just begins to repeat “re-routing” over and over again, turning you back and forth until you realize that you haven’t made any progress. At this point, you are frustrated, the kids are frustrated and all you want to do is get back on the path to your destination. Everything has become so easy with the GPS that many travelers have forgotten what it is like to deal with surprises along the way.
It can be the same way with investing during retirement. You are heading down the road, without a care, and then you see a sign that reads, “Road Closed due to Political Risk”. Welcome to the markets in 2019.
The chart above shows the current position of the US Treasury Yield curve from 3 months to 30 years. Normally, the yield curve has a positive slope from left to right, paying investors additional interest to take on excess risk over time. Right now, 20 year bonds pay less interest than a money market fund. This is the bond market telling us to keep our maps handy.
Why Do We Care?
While the details of the anecdote above are somewhat tongue-in-cheek, the parrallels that we draw from them are very real. Until about a month ago, you could rely on investment GPS to get you where you wanted to go. The expectation of lower rates and a US-China trade deal had markets reaching new highs. Bond yields were stable and growth forecasts suggested neither excessive inflation nor recession concerns.
But about a month ago, there it was, the “road closed” sign. The breakdown of talks and introduction of additional tariffs introduced economic and political risk (cue the GPS prompt “Re-routing”). The market seems to agree, with equities selling off and bond yields moving lower during May. Yields are indicating that lower growth is ahead and some would argue the chart above is signalling something closer to recession. Many investors are simply pulling off the road while trying to re-boot their GPS.
When living in retirement and depending on your portfolio, you can’t pull over and wait for the storm to pass. Many HCM clients depend on regular portfolio distributions no matter what the market is doing. Our job now is get the map out and make sure we are ready to take one of the alternate routes we have planned, if necessary.
HCM’s base case at the beginning of the month was for a continuation of negotiations between the US and China, with the acknowledgement that any increase in negative rhetoric could make the ride a little more bumpy. We liken it to the difference between the pilot telling passengers to put on their seat belts vs. telling the flight attendants to sit down and buckle up. Sure enough, rhetoric has flared up and the markets followed suit. The wildcard came with the threat to also increase tariffs with Mexico over immigration issues. Add in bond yields continued collapse and the probability of less than favorable conditions going forward has certainly increased.
With that said, HCM is making slight adjustments to our equity positioning by moving a small portion of our international position to a US minimum volatility strategy. Our opinion is that the US is better situated to weather a growth slowdown than foreign markets. With a portion of equities allocated to reduced volatility strategies, we believe our portfolios will be better insulated from additional market turbulence. Also, if we experience additional meaningful declines we will likely take defensive action in our HCM Advance and Defend ™ portfolios. Our Investment Committee will keep the roadmap handy to ensure we are prepared to act if detours are necessary.
Weekly Focus – Think About It
“A year from now you may wish you had started today.”
Performance last week for the four major asset classes were:
- U.S. Stocks – Russell 3000 (IWV) – Loss of -2.63%
- Developed Foreign Markets (EFA) – Loss of -2.13%
- Emerging Markets (EEM) – Gain of 1.90%
- Fixed Income (AGG) – Gain of .90%
(Note: performance is based on the change in price plus dividends)
Last Week’s Headlines
- President Trump’s threat of tariffs on Mexico added fuel to a slide in equity markets and drop in government bond yields.
- China announced a temporary takeover of Bank of Baoshang, citing credit risk-its first takeover of a bank in around two decades.
- China also announced the possibility that it could limit the supply of rare earth minerals to the US.
Eye on the Week Ahead
Central bank policy will be in focus as markets look for signs from the ECB policy meeting and whether policy outlook is changing with a modified forward guidance a likely first step.
If you have questions about the recent market conditions, please contact a member of HCM’s Wealth Advisory Team:
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