By Joe Smalley, Accredited Investment Fiduciary®
As many of you know, in certain portfolios we have been sitting on cash for a while waiting for a buying opportunity. On Tuesday, we may finally get that opportunity.
If you’d like to invest some cash that you have been sitting on, please give us a call to review your situation.
In the spirit of the great political debates that we have been privileged to watch this spring, I thought I would do a compare and contrast piece on the four top issues that I’ve been looking at to determine a good entry point for additional investment:
· US economy
· US political landscape
In this long-read piece, I have included hyperlinks to 42 additional resources and stories. If you read each and every article, it will only take you half a day to finish this market update. But I assure you, they are all very interesting and give different perspectives on the various topics.
Since the end of last year, oil prices have been hugely volatile.
I don’t think it is any coincidence that after Saudi Arabia’s biggest buyer North America became a net exporter of oil, and China, Saudi Arabia’s second largest customer, recently signed a long-term contract to purchase liquified natural gas from Russia, the House of Saud decided to bring down the price of oil. In fact, that is precisely what Abdel al-Jubeir, the Saudi foreign minister, said back in January. “People should go back to Adam Smith and basic economics. It’s about supply and demand.” Of course, it will also hurt their biggest rivals, Iran. It also has a devastating effect on Russia’s economy. And let’s not forget that the invisible hand sometimes smacks you on the nose. The downturn in oil prices has impacted the oil industry in the US, with thousands of jobs being lost. Experts differ as to what the consequences will be over time.
But as oil prices fell from $72 per barrel to less than $30 per barrel, it brought the stock market down with it. Usually uncorrelated, the two have recently moved in tandem. It appears that oil may have reached the bottom in January, and has now risen back above $35 per barrel. That is very good news if you own stocks.
Bullish: Oil found a bottom and bounced off of it.
Bearish: Iran’s production has yet to hit the market.
Europe is a wonderfully idyllic place to visit on vacation. But politically and financially, they are a bit of a mess. Think of it, when we went through our financial crisis, we totally revamped the banking system, strengthened controls, and increased capital requirements to ensure that a similar event could not happen in the future.
Europe waited five years to do these things, and some think they didn’t go far enough.
When we went through our fiscal crisis, our one country with two parties could not come up with a solution. We created a super committee. It was unable to come up with a compromise. The White House and Congress were at odds. One country. Two parties. No fix.
The European Union has 17 voting countries, each with several political parties. The odds are not in their favor for finding a solution. Here is a wonderful timeline on the European financial crisis from the BBC. In fact, some are saying that Europe is one crisis away from imploding.
And although Europe was slow to the stimulus party, it seems that at America’s urging, the European Central Bank is finally coming around to using that lever to get their economy moving. Last week, the ECB announced that they are lowering interest rates and increasing the buyback of assets.
Bearish: If Britain leaves the EU, others could follow. Immigration is becoming more of an issue in Europe, brining in additional workers in need of jobs, when in some countries, the unemployment rate is already over 20%.
#3: US economy
It has been said that the economy in the United States is analogous to owning the best house in a bad neighborhood; it’s not necessarily good, but it’s better than the others. (See Europe, above.)
But in December, the Federal Open Markets Committee, after 9 years of easing, raised rates as a nod that the US economy was improving.
Shortly after that, with commodity prices getting hammered and the stock market falling, the Fed reversed course. In February, the Fed saw more downside risk to the economy than upside.
The Federal Reserve Bank of New York posts a snapshot of the economy on their website. They highlight both positive signs (housing, payroll growth), and signs of softness (manufacturing, inflation, consumption slowing).
But last week, a new jobs report showed that US economy added 242,000 new jobs in February. The unemployment rate stayed at 4.9%. These were better than expected, and showed that the economy’s trajectory was not heading down, as was feared.
(Here’s a little sidebar. The unemployment rate that is always reported is from the Bureau of Labor Statistics. For technogeeks like me, it is the U3, which is just one of the many different ways that the BLS slices and dices metrics. But it only measures a handful of workers. To be fair, it is the gauge that has always been used, so it is helpful to continue to report on it. But perhaps a better benchmark may be the U6, which includes all people who are out of work. Here is a comparison of the U3 versus the U6. Although the percentage is significantly higher, the trend is similar to that of the U3; things are getting better.)
Bullish: The US economy continues to expand.
#4: US political landscape
Earlier, we touched on the inability of Congress and the White House to reach an agreement on the fiscal debate. Historians will argue about his legacy, but when President Obama was first elected, he pledged to work with Congress. That did not happen. It is difficult to pinpoint the start of the trouble with Congress, but in this Christian Science article, they attempt to highlight some of the issues. In his last State of the Union address, Mr. Obama discussed his regret for the political rancor on his watch.
Regardless of which side of the political aisle you are on, one thing is clear, the wealth gap has widened significantly in the past decade. And here are two unanticipated consequences of the Fed’s decision to lower interest rates to spur the economy:
1. The Fed backstopped asset prices (the Bernanke put), so that people who owned assets like stocks and real estate, saw their net worth increase dramatically.
2. At the same time, people who did not own assets, did not see their net worth increase. In fact, only one-third of moderate income earnings have savings accounts. Over the last decade, those accounts earned less money, as the Fed lowered interest rates.
A logged-jammed government seething with rancor combined with an economic period where wages and asset prices have been suppressed and distorted is a perfect environment for outsider political candidates running for our country’s highest office.
Interestingly, however, there are two candidates on opposite sides of the political spectrum that fit that bill.
Hillary Clinton and John Kasich typify traditional Democratic and Republican candidates, but each are finding it difficult to tap into the enthusiasm and populist appeal that Sanders and Trump are currently enjoying.
But with Super Tuesday behind us, two candidates are racking up the delegates. Hillary Clinton has amassed a large number of delegates, and importantly, the majority of super delegates. Barring catastrophe, she will be the Democratic nominee.
On the Republican side, it is mathematically possible for the remaining four candidates to find a path to the nomination. But if Trump can pull off victories on Tuesday in Ohio and Florida, he will become the Republican nominee.
Bullish: On Tuesday we could have a clear idea of who the nominees for president will be.
Bearish: If Trump loses Ohio and Florida, we could see brokered convention in Cleveland.
(If it ends up being Clinton vs. Trump in November, as of today, the polls favor Clinton by 6%.)
Since last fall, in some of our client accounts we have been sitting on cash waiting for a buying opportunity. Specifically, we were waiting for four things to improve:
· The price of oil to stabilize
· Improvement in Europe
· Continued economic growth in the US
· Political clarity with regard to the candidates for President
While challenges remain with these issues and others (Russia, Syria, China, Brazil to name a few), on Tuesday we could see all four of the above issues clear up. As such, we will likely be adding to equity positions starting this month.
For more market commentary, check out Commonwealth’s Chief Investment Officer, Brad McMillan’s blog The Independent Market Observer. Here is his latest article.
It is important to mention that all situations are unique and you should seek guidance in implementing your strategy based on your goals, time horizon, asset allocation, and risk tolerance. If you want to discuss these, please give us a call.
Joe Smalley is a financial advisor located at 213 East Saint Joseph, Lansing, Michigan, 48933. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 517.487.4850 or at www.smalleyinvestments.com.