Q2 2016 Commentary – July 14, 2016
“The More Things Change the More They Stay the Same”
The second quarter of 2016 was a good one. Stocks continued their steady climb higher to the point where we are at all-time highs as of this writing. At the same time, bond yields plummeted to near historical lows, providing appreciation for many bond holders. Oil prices recovered significantly, and “risk assets” seemed to regain their favor – especially in the US. Generally speaking, investors had smiles on their faces when opening their quarter-end statements.
So, let’s look at the coinciding news cycle for the period.
The world was left stunned by the UK’s decision to opt out of the European Union – left wondering if this was the beginning of the end for the EU as we know it. Yields on government debt of several of the world’s largest countries went negative for the first time in history. The risk and reality of terror attacks increased around the globe. In the US, our upcoming presidential election nearly came down to a decision between a socialist and a billionaire with no political experience. And if all of that wasn’t enough, we now have rioting in the streets stemming from growing distrust between the people and the police charged with protecting them.
Confused? We are not then surprised when we field questions daily from anxious clients, even though their portfolios are doing well. Below is a brief discussion on the two topics that seem to be causing the most angst among investors we speak with.
For anyone lucky enough to have not listened to countless hours of discussion on the topic, “Brexit” refers to the UK’s recent decision to leave the European Union. While this may seem obnoxiously oversimplified to any Brits reading along, the decision ultimately came down to a majority of the British public voting to retain complete control over their own economic and political issues.
So what does it really mean for the global economy, or more specifically to our economy here in the US? The simple answer is that no one knows for sure. The majority of economist types predict that the decision will lead to slower – potentially significant – economic conditions for the UK. There is a much more diverse set of opinions as to how the decision will then affect the global economy – but there are few (if any) that seem to suggest that it would be a net positive, at least in the short term.
Our readers will not be shocked to hear us point out the fact that no one really knows what this is going to mean to the US or global economies. How can they – there is little (if any) historical context for comparison. From our standpoint, the economic risks to the US seem minimal. That said, our bigger concern is whether or not this will lead to a complete dissolution of the EU as other member countries contemplate the same decision. That scenario would create an environment of uncertainty and economic chaos that most certainly would affect our own economy and markets.
With what we know so far – and given the market’s recent response – it would seem that our economy has bigger fish to fry….at least for the time being.
The Presidential Election
Those who know me well can attest that I am not one who lacks opinions….or minces words expressing them. So this is a dangerous topic – yet one that we want to discuss because we get SO many questions and concerns about it.
We do not believe that the markets will have a major, short-term reaction one way or the other based on the election results. For one, the President elect only has so much power – they have to get any of their policies through the Congress and Senate. If the elections resulted in one party gaining control of all three branches, we would be less surprised by more immediate market reactions – and that could be positive or negative. The possibilities of higher taxes, greater regulations or protectionist policies are the three areas we view as the most negative for markets in the short-term. Lower taxes, less regulation and continued “pro-globalization” policies would not surprisingly be viewed as short-term positives.
We are much more concerned with what this election means for the long-term health of the economy and markets. Our biggest fear remains a “Day of Reckoning” resulting from out-of-control debt levels (consumer, commercial and government) and spending along with decision-making focused more on the next election-cycle than the long-term health of the country. Which leads us to the most important part of our discussion today….
The issues discussed above are two of many uncertainties facing economies and markets around the globe. They are but two examples of why we remain of the opinion that – generally speaking – risks continue to outweigh potential reward with many investments. Before Brexit, and before our Presidential nominees were decided – we had already suggested the reduction (not removal) of equities in one’s portfolio. Similarly, we had already suggested favoring shorter maturities and higher credit quality to mitigate credit and interest rate risk with one’s bonds. We will spare everyone the more technical analyses this time around, but our opinions remain unchanged – and the events of the past quarter most certainly have done nothing to alleviate our fears.
Importantly, the recent quarter also demonstrated the importance of staying diversified and not making “all-in or out” investment decisions based on short-term thinking or opinions. Even with all of the headlines and turmoil, equity markets in this country are achieving record highs. Even with interest rates near historical lows, yields have continued lower. It can never be reiterated enough – there is no one on this earth that can accurately and consistently predict short-term performance of any financial market or instrument.
Start with financial planning. Identify your very specific short and long-term objectives. Understand your true tolerance for risk. Always do these first, and let them dictate your long-term investment strategy. Recognize and react to perceived risks and opportunities, but do not allow yourself or your portfolio to be consumed by them.
You can then with confidence view the economic news cycles of the past quarter and decade for what they most certainly are – some of the most fascinating that we will see in our lives. Finally, turn off the TV and enjoy the rest of the summer with family and friends.
To all of our clients, we thank you for the trust and confidence you have placed in Round Hill Wealth Management.
Douglas Brymer David Swanson
President & Wealth Advisor Principal & Wealth Advisor
The opinions expressed in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
No strategy assures success or protects against loss.
Securities offered through LPL Financial. Member FINRA/SIPC. Investment advice offered through HighPoint Advisor Group, LLC, a registered investment advisor. HighPoint Advisor Group, LLC and Round Hill Wealth Management are separate entities from LPL Financial.