When Only One Thing Matters

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In my head is the vague memory of some political talking head who predicted economic ruin under Obama. He had once worked for the US Government in the 80s and had predicted a recession using only three economic indicators. His call that a recession was imminent led to much derision and he was ultimately let go from his job, left presumably to wander the earth seeking out a second life as political commentator making outlandish claims. I forget his name and, so far, Google hasn’t been much help.

I bring this half-formed memory up because we live in a world that seems focused on ONE BIG THING. The ONE BIG THING is so big that it clouds out the wider picture, limiting conversation and making it hard to plan for the future. That ONE BIG THING is Trump’s trade war.

I get all kinds of financial reports sent to me, some better than others, and lately they’ve all started to share a common thread. In short, while they highlight the relative strength of the US markets, the softening of some global markets, and changes in monetary policy from various central banks they all conclude with the same caveat. That the trade war seems to matter more and things could get better or worse based on what actions Trump and Xi Jinping take in the immediate future.

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Now, I have a history of criticizing economists for making predictions that are rosier than they should be, that predictions tend towards being little more than guesses and that smart investors should be mindful of risks that they can’t afford. I think this situation is no different, and it is concerning how much one issue has become the “x-factor” in reading the markets, at the expense of literally everything else.

What this should mean for investors is two-fold. That analysts are increasingly making more useless predictions since “the x-factor” leaves analysts shrugging their shoulders, admitting that they can’t properly predict what’s coming because a tweet from the president could derail their models. The second is that as ONE BIG THING dominates the discussion investors increasingly feel threatened by it and myopic about it.

This may seem obvious, but being a smart investor is about distance and strategy. The more focused we become about a problem the more we can’t see anything but that problem. In the case of the trade war the conversation is increasingly one that dominates all conversation. And while the trade war represents a serious issue on the global stage, so too does Brexit, as does India’s occupation of Kashmir (more on that another day) , the imminent crackdown by the Chinese on Hong Kong (more on that another day), the declining number of liberal democracies and the fraying of the Liberal International order.

This may not feel like I’m painting a better picture here, but my point is that things are always going wrong. They are never not going wrong and that had we waited until there were only proverbial sunny days for our investing picnic, we’d never get out the door. What this means is not that you should ignore or be blasé about the various crises afflicting the world, but that they should be put into a better historical context: things are going wrong because things are always going wrong. If investing is a picnic, you shouldn’t ignore the rain, but bring an umbrella.

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The trade war represents an issue that people can easily grasp and is close to home. Trump’s own brand of semi-authoritarian populism controls news cycles and demands attention. Its hard to “look away”. It demands our attention, and demands we respond in a dynamic way. But its dominance makes people feel that we are on the cusp of another great crash. The potential for things to be wiped out, for savings to be obliterated, for Trump to be the worst possible version of what he is. And so I caution readers and investors that as much as we find Trump’s antics unsettling and worrying, we should not let his brash twitter feuds panic us nor guide us. He is but one of many issues swirling around and its incumbent on us to look at the big picture and act accordingly. That we live in a complex world, that things are frequently going wrong and the most successful strategy is one that resists letting ONE BIG THING decide our actions. Don’t be like my half-remembered man, myopic and predicting gloom.

Information in this commentary is for informational purposes only and not meant to be personalized investment advice. The content has been prepared by Adrian Walker from sources believed to be accurate. The opinions expressed are of the author and do not necessarily represent those of ACPI.

Beware the Rally

*At the time that I wrote this markets had just finished several positive sessions, however by the time it was ready markets had once again changed directions!

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I’m going to potentially embarrass myself and go on the record as saying we shouldn’t place too much trust in the current market rally, though the upturn is welcomed.

Rallies present opportunities for potential short-term gain, and with markets having shed roughly 10% over the month of October, there is certainly money to be made if you’re feeling sufficiently opportunistic and have a plan. For the rest of us, the rally is a welcome break the punishment the market has been delivering, and an opportunity to see portfolios stabilize and regain some ground.

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The long-term viability of a rally, its ability to transition from opportunistic buying to sustained growth, very much depends on the fundamentals of that rally. Are markets sound, but oversold? Or are fundamentals deteriorating and represents more hopefulness than anything else?

Readers of this blog will not be surprised to find out I have no set answer to this question. As always, “it depends”. But as I look over the news that has supposedly rekindled the fire in the markets much of it seems at best temporary, perhaps even fanciful. Up against the wall of risk that investors are currently starring down, the best news currently available is that Trump had a phone call with Xi Jinping and has asked for a draft to be prepared to settle the trade disputes between the two countries.

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I’m of the opinion that a recession isn’t imminent, but it should be obvious that recessions happen and the longer we go without one, the more likely one becomes. That seems especially true in a world that is undergoing a seminal shift when it comes to international trade and multilateral deals. To take one example, in the last year U.S. soybean exports to China have dropped by 97%, with no exports for the last quarter. This is a trade war still in its infancy. Other market data is mixed. Even as job growth exceeds expectations it will also keep the Fed raising rates. Housing starts have dropped significantly below expectations, driven in part by rising costs.

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All this is to say that market rallies like the one we’ve just seen should be treated with trepidation. Investors should be cautious that a bottom has been reached and that this is a good time to rush into the market looking for deals, and we should keep an eye on the fundamentals. Rallies falter precisely because they can be based more on hope than on reality.

So what should investors do if they want to invest but are unsure about when to get into the markets? Come talk to us! Give us a call and help get a plan together that makes sense for your needs! Check out our new website: www.walkerwealthmgmt.com or give us a call at 416-960-5995!

The Deceptive Nature of Indices

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An essential part of the business of investing involves figuring out how well you are doing. In some respects, the best benchmark for how well you are doing should be personalized to you. How conservative are you? What kind of income needs do you have? How old are you? While the case remains strong for everyone to have a personal benchmark to compare against their investment portfolios, in practice many people simply default to market indexes.

I’ve talked a little about market indexes before. They are poorly understood products, designed to give an impression about the overall health and direction of the economy and can serve as a guide to investment decisions. Large benchmarks, like the S&P 500, the TSX, or the FTSE 100, can tell us a great deal about the sentiment of investors (large and small) and what the expected direction of an economy may be.

But because these tools are usually poorly understood, they can contribute to as much confusion as they do clarity. For instance, the Dow Jones uses a highly confusing set of maths to determine performance. Last year General Electric lost about 50% of its market capitalization, while at the same time Boeing increased its market capitalization by 50%, but their impact on the Dow Jones was dramatically different. Boeing had an outsized positive contribution while General Electric had a much smaller negative impact.

The S&P 500 currently is one of the best preforming markets in 2018. Compared to most global indexes, the S&P 500 is ahead of Germany’s DAX, Britain’s FTSE 100 and FTSE 250, Japan’s Nikkei and Canada’s TSX. Yet if you are looking at your US focused investments, you might be surprised to see your own mutual funds lagging the index this year. If you were to ask an ETF provider or discount financial advisor why that is they would likely default to the answer “fees”, but they’d be wrong.

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While the S&P 500 isn’t exactly “running away” it is doing considerably better than the TSX and the UK’s FTSE 100

This year is an excellent example of the old joke about Bill Gates walking into a bar and making each patron, on average, a millionaire. While the overall index has been performing quite well, the deeper story is about how a handful of companies are actually driving those returns, while the broader market has begun to languish. Of the 11 sectors in the S&P 500, only two are up, technology and consumer discretionary, while a further 6 were down for the year. In fact the companies driving most of the gains are: Facebook, Amazon, Apple, Alphabet (Google), Netflix and Microsoft. The 80 stocks in the consumer discretionary space not in that list have done almost nothing at all.

What does this portend for the future? There is a lot to be concerned about. The narrowing of market returns is not a good sign (although there have been some good results in terms of earnings), and it tends to warp investment goals. Investors demand that mutual fund returns keep up with their index, often forcing portfolio managers to buy more of a stock that they may not wish to have. In the world of Exchange Traded Funds (or ETFs), they participate in a positive feedback loop, pulling in money and buying more of the same stocks that are already driving the performance.

In all, indexes remain a useful tool to gage relative performance, but like with all things a little knowledge can be deceptive. The S&P 500 remains a strong performing index this year, but its health isn’t good. Healthy markets need broad based growth, and investors would be wise to know the details behind the stories of market growth before they excitedly commit money to superficially good performance.  

Did that make you worried? Don’t be scared, call us to set up a review of your portfolio to better understand the risks!