Uncertainty and Opportunity - July 2016

Ann Miller |

While it is true that uncertainty is good for cable news and can drive the markets lower, it is also true that uncertainty creates opportunity.  As mentioned in our last market comment, “Bad news may move investments but uncertainty rattles the markets”.  We are pleased with our new investments following the “Brexit” vote as well as the trimming of long-held positions that have grown beyond our desired portfolio weighting. 

 

The Bottom Line:

  • We forecast a 100% chance of uncertainty through the election cycle.  “Give me patience … and give it to me now!”
  • We continue to maintain a balanced asset allocation and are well-positioned for a potentially turbulent market. 

 

The Uncertainties – A Partial List

  • Will more countries set elections regarding their status in the European Union?
    • The European Union (EU) has a major problem in how to process the exit of Great Britain.  Keep in mind, Great Britain is the only country in the EU to maintain its own currency, the British Pound, which continues to fall in value.   A good question is: Should voters in another country decide to leave, how does the re-establishment of a national currency affect markets and how will the Euro be affected?  The weaker economies of Greece, Italy and Spain are essentially treading water and the prospect of a weaker EU may mean fewer life preservers in stormy economic weather.  The great uncertainty is if and when the dominos begin to fall.  Keep in mind, the value of the U.S. dollar overseas can have a significant impact on corporate earnings for U.S. multi-nationals.
  • Which party will control the White House?  The Congress?
    • Politics aside, the mechanics of our economy and bureaucracy need an overhaul.  This is not a recent predicament as it has been building for 60 years regardless of party control.  While Washington deserves less of the credit in a strong economy and more of the blame in a weak economy, an election following a two-term presidency, or any major election for that matter, naturally creates greater uncertainty for the markets. Stay tuned.
  • Will the worldwide search, including the U.S., for a growing economy produce results?
    • There is stagnation across the global economic landscape and a significant reason for the U.S. markets resiliency has been that when compared to other equity markets, the U.S markets are the best option for worldwide investors.  It is simply a fact that economies and markets have short and long-term cycles and patience is often required.  As long-term investors, with rebalancing and sector movement, we understand that the historical movements of sectors and markets is measured in years rather than commercial breaks.  While it is beneficial to manage the short cycles well, it is critical to properly manage the larger cycles.
  • Are there any fresh ideas for the Federal Reserve and other central banks regarding interest rates and monetary policy?
    • The Federal Reserve, the European Central Bank and the Bank of Japan have little left in the way of meaningful policy options.  Artificial controls of interest rates, debt and currencies have added little value to their respective economies and capital markets. The Chinese Central Bank could be included, however their interpretation of free-market capitalism is less than ideal.  Therein lies the uncertainty of whether further policy moves will help an economy or if the unintended consequences cause harm.
  • What can we expect from 2nd quarter earnings announcements?  Is the business community optimistic regarding the 2nd half of 2016 and beyond?
    • The 2nd quarter may prove to be a particularly difficult earnings season for corporate America and it will likely prove to be even more difficult to project optimism for the second half of the year.  This outlook will be key to the market volatility in the coming weeks.  One item we will be monitoring is the level of “stock buy-backs” and their effects on corporate earnings. A stock buyback is when a company will buy its own stock, thereby reducing the number of shares available for purchase in the market. 

 

The Opportunities:  

As mentioned in our previous comment, with our partial investment in new positions in June and additional cash to put to work at selected market levels, we are well-positioned going forward.  Our investment selections and allocations lean to a defensive posture able to weather market weakness while participating in market gains.   

For some time, we have viewed the markets as overvalued by several measures. Any market or sector can stay over-valued for an extended period but the variables continually change.  One common measure is the standard P/E or Price to Earnings Ratio.  It’s simple. In an over-valued market, either earnings grow or prices fall.  In response to this threat, we maintain a high cash and fixed income allocation so falling prices can present an opportunity.  Our individual stock allocations have been lowered to a more diverse mix of mutual funds and exchange-traded funds in order to reduce overall portfolio risk and volatility. The Dow Jones Industrial Average has crossed the 18,000 level six times since May of last year only to retreat each time.  This volatile market is an opportunity to study the market drops and the recoveries to gain insight as to where opportunities may lie in the future.

As always, please feel free to call with any questions.

Our June 24th market comment is provided below as it remains applicable going forward.

 

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this newsletter (article), will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Due to various factors, including changing market conditions, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this newsletter (article) serves as the receipt of, or as a substitute for, personalized investment advice from Affinity Capital.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.