Note: This commentary was sent to Earth Equity clients on August 14, 2019
We seeing a considerable drop in world stock markets today. I blame this negative movement on a number of factors, including the geopolitical shenanigans related to the trade war with China.
The President yesterday delayed imposing new tariffs on China. Markets rejoiced, but I believe traders are getting tired of the see-saw news coming out of Washington. Either make a deal or not, but just show some visibility so businesses and consumers can plan for import-related expenses.
The President should also leave the Fed alone to do their job. In my opinion, the Fed’s decision to lower interest rates recently was a mistake as it will have virtually no effect on the economy (rates are already quite low historically speaking) and will only serve to push down the decent yields we’ve been seeing in money markets and other safe monies over the past year or so. This was a political decision and will leave many investors with virtually no opportunity to find a safe yield.
Bond markets have been showing concern about the durability of the current economic boom that we’ve been experiencing since the end of the “Great Recession” in 2009. At one point today, we experienced what is called an inverted yield curve. What this means is that 10 year treasury yields dropped below the yield of 2 year treasuries. Typically, the longer the bond, the higher the interest rate because you’re locking your money up for a longer period. In the past, an inverted yield curve told the tale of upcoming recession.
Europe, especially Germany, has also been strained because of trade war concerns. Factor in the recent rise of Boris Johnson to power in Great Britain and his promise to implement Brexit and we have even more uncertainty complicating things.
And if that wasn’t enough, the uprisings in Hong Kong put China into a very difficult position. Hong Kong is a major Asian economic center, and China is now between a rock and a hard place when it comes to cracking down on the dissenters. Will the rest of the world draw a line in the sand and say enough or will China be allowed to implement the same harsh limitations of freedoms in the city? We’ll see…
So where does that leave our outlook on markets and the economy? Well, as you know, we are strong proponents of maintaining a well-diversified portfolio. All of our diversified mutual fund portfolios have been preparing for a market downturn for months by having elevated levels of money market funds and an overweight in more stable, large-cap domestic stocks.
I believe there still are decent fundamentals left in the economy, but these seem to be eroding. The good news is that unemployment remains low, consumer confidence is up and interest rates are low. Conversely, Germany just reported 3 months of a contracting economy and China reported considerably less industrial production growth than anticipated.
Know that we are constantly monitoring the situation and will make changes to the diversified mutual fund portfolios if needed. However, keep in mind that as of 2:25 pm today, the MSCI All Cap World Index is still up 6.98% YTD and the S&P 500 is up 13.2% YTD.
One aspect I’d like to point out that benefits Earth Equity clients is our fossil-fuel free investment policy. The energy sector has been one of the hardest hit sectors, and in fact, over the past five years, the sector is down a total of 40.9% as measured by the Energy Sector SPDR XLE exchange traded fund. This, in addition to the allocation in bonds and money markets should cushion portfolios during period of increased volatility.
Also remember that our Green Sage Sustainability Portfolio is a stock-only portfolio and will feel the full effects of market volatility unless it’s paired up with a more conservative allocation.
Please let me or your financial advisor know if you have any questions or concerns. Thank you for your friendship, business and introductions.