Market Watch – Time for Portfolio Reallocation?


Market Perspective for Sustainable and Responsible Investors looking at the question of where equities are heading in these turbulent markets and if portfolio asset re allocations are in order.

“So, when should I adjust my retirement portfolio’s asset allocation from 100% equities to something else? The market (Dow Jones Industrial or DJI) just broke 26,000. I’m getting nervous,” my friend recently asked me.

It’s a good question and turned out to be a bit prescient.

But it’s not just a good question because it may be time for him to do a portfolio asset reallocation (he is just over 60 but looks 45!). It’s also a good question because the market has been booming for so long. Indeed, it was up 6% in 2018 alone. Now it is down, but as you can see in the graph, it still up almost 18% over the last year. The long term DSI average is about 7% annually. 2017 saw an almost 3 times the average annual increase.

Such lofty heights demands we be jittery, even as economic fundamentals suggest there are no bug-bears in the US or global economies.

Staying Ahead of the Market….

The economy runs in cycles, with downward patches tending to come as a surprise, and usually on the heels of a long expansion. But watching the market is pointless, it’s the final indicator of change!

There are many methods to anticipate stock market change as there are analysts. Many are very complex. Mine is simple.

I follow US employment and inflation rate trends. Both are currently experiencing upwards movement, movement which is forcasted to continued (see graphs and see OECD inflation forecasts)

These data are considered almost lagging indicators. By the time inflation and wage data is published, the impact on the economy has already been made and stock market has typically reacted.

That is why I also watch for leading indicator stories in the business press. This helps me anticipate where the indicators will go in the future.

An example. Walmart’ recently said it will raise its minimum wage from $9 to $11. Despite timing its announcement to coincide with Trump’s tax bill, the company is not doing this to Make America Great Again. No, WalMart is one of the stingiest companies around and their move is certainly not altruistic.

Rather, the company is reacting to increased wage pressure for unskilled labor. When there is so much demand for the least skilled workers among us, it’s time to suspect something is ‘going down’ in the economy.

Interest rates are also moving. See ten-year US treasuries trend graph which looks as if prices are changing direction. How high and fast rates will go is debatable. This is because we are at the end global quantitative easing. Bond buyers are going to be far more ‘price’ conscious, a substantial shift from the ‘buy anything and everything’ issued by government in QE era.

Political Uncertainty is Getting the Best of Me

I haven’t made any trades in my portfolio recently. I am not a market timer, and I am not overly worried about the economy.

What does concern me is politics. Three points are worth noting:

First, the Trumporia leading to the year-long market surge is over. This was pure speculation on all the goodies Trump would hand out to business. So unless there is something we don’t know about Trump’s ‘massive’ infrastructure plan (aka a meaningful amounts of federal money going to the states), there will be little Trumporia ‘umph’ left in the market.

Second, the surge related to the anticipated and now delivered Trump tax bill is also done. The spate of subsequent corporate announcements regarding capital and job repatriation were in equal measure spectacular, sycophantic and suspect. It remains unclear what repatriation will mean to the economy. A gambling man probably wouldn’t bet the mortgage on it amounting to much impact.

Third, its all about politics. I have one observation and two risks.

More Easier for Business Not Certain: Beyond tax cuts, the current economic expansion is partly based on the belief Trump will keep on making things easier for business.

Without a coherent plan, and less support from Congress than presidents whose party didn’t control even one house, getting anything done in Washington is not a given.

Political Crazy. Many Republicans think Trump is a genius. I don’t see that. What I can say with full confidence is that he is unpredictable.

Capital markets don’t love this brand of crazy, and we should worry about unexpected trade and foreign investment monkey business.

Cases in point: pulling out of the Trans Pacific Partnership trade pact and solar panel tariffs.

Both decisions were based on shaky and/or nonexistent economic strategy. The White House economic IQ is not what it used to be. With a turnover of senior staff around 35% and rising, the already dim lights at 1600 Pennsylvania Avenue are not about to get any brighter.

Mueller. These political risks are minimal compared to what the Mueller’s investigation might affect. Many outcomes are possible, each with different disruptive potential.

The investigations may result in nothing more than a verbal sanctioning. Trump would loose (even) more power and control but stay in office. This will have minimum impact on the economy. If impeachment and or criminal charges are in the wings, all of Washington will be paralyzed, with inevitable spill over to Wall Street, and the economy in general.

What I fear most: the corner Trump may be backed into.  If pushed to hard, I have no doubt Trump will start a war. Read Lawrence Wilkerson’s, former aid to Colin Powell, convincing (and frightening) argument that the White House is already laying the ground work for war with Iran.

What does this mean for Equities?

Like most economists, I can’t find anything too smelly about the economy or markets generally, and equities specifically. With much unknown and PE ratios moderately high, the stock market in this context is likely to revert back to the side-way movements we saw not that long ago.

This means investors and analysts are going to have to work harder to find outperforming equities. No more riding a frothy market and calling it a win.

Small investors need to sit tight with (hopefully) a load of quality stocks and bonds in their portfolios. The markets will move forward, but as always, we don’t know when.

In the end, I told my friend that if he want to reallocate assets away from equities due to age or circumstances, this may not be the worst time to do it given prices are not likely to move upward in any dramatic way soon.

Of course, I wish I had published this article two weeks ago when I was supposed to have.

NOTE Please consult your financial adviser before taking any investment decision. The opinions expressed in this article are not intended as professional/ investment advice, but rather a perspective on the economy and stock markets.


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