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Calling It For Trump

Back in the first week of July, 2020, we called the election for Joe Biden.  This year, we’re calling it for Trump and believe that investors need to start positioning their portfolios for a Trump presidency. 

 

Similarly to 2020, I don’t like it one bit. This idea of having to choose between the pathological narcissist who genuinely seems to think that corruption and insolence are virtues and a challenger who is senile and just as corrupt as the other guy except maybe he covers it up a bit better is sort of repulsive to me, just as I’m sure it is to you. 

 

I would have posted this on Friday, the day after that miserable debate, but I had to get it approved by our compliance department. 

 

You: “Wait.  Somebody vets this s**t?” 

 

Me:  “Yes, somebody vets this s**t, and they’re a lot like you— they agree with 50% of it, care about 50% of it, and above all else, wish that I would tone it down 50%.” 

 

All good.  We’ve got things to say.  And one of the things we want to say to Joe Biden is, hey, Joe, if you intend to stay in this race, you’d better get a food taster. 

 

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Last week’s volatility in tech highlights the risk of a correction. If a sell-off spirals, consumer confidence will probably take a beating, financial conditions will likely tighten and losses could spread to unpredictable parts of the financial system.  We see several reasons for concern: 


  • French President Emmanuel Macron’s call for a snap vote for parliament has focused investors on the potential for a big-spending populist government taking office.  Analysts at Evercore recently cautioned that the political uncertainty in France “threatens a prolonged phase of dysfunctionality in Europe and in the tail could threaten a new euro crisis.” 

 

  • Any further escalation in Middle East tensions has dual risks for the Fed.  If, for instance, fighting between Israel and Hezbollah were to morph into all-out war, we’d expect oil prices to spike, resulting in stagflation risks at a time of slowing economic growth.  US Defense Secretary Lloyd Austin says a war between Israel and Hezbollah would have “terrible consequences.”   Then there’s the potential for the war in Ukraine to further upend supply chains and confidence.  


  • Minneapolis Fed President Neel Kashkari last month pointed to stress within the commercial property market, saying he expects “big losses” and surprises in where the losses take place. As Kashkari knows from 2007-08, red ink in one part of the real estate sector can quickly spread.  From malls to offices, we see the wave of distress as just starting. Commercial property deals in the US are starting to pick up—  at deep discounts that are forcing lenders around the world to brace for their loan portfolios to get monkey-hammered. 

  • The Presidential debate has focused investors’ minds on what’s already one of the most acrimonious campaigns in history.  A messy election--  or a messy outcome--  may rattle markets.  

 

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Social and mainstream media have been reporting vociferously all year on the latest investment hypes such as “disruptive technology,” “meme stocks,” and “artificial intelligence,” so it really isn’t surprising that investors have (once again) been groomed to salivate over the next get-rich-quick scheme.  …Don’t be that guy. 


The reality is that many financial advisors and portfolio managers feel that if they don’t meet or beat benchmark returns from one year to the next, they risk losing clients, and this has led to many of them pushing the envelope. 


The most recent paper chase has been all about artificial intelligence, and it has led to a deep bifurcation in the market as a handful of stocks increasingly rise versus the rest of the market.  As the market’s breadth has narrowed, many advisors and managers have taken on increasingly larger weights of fewer stocks in portfolios. 


The top 10 stocks in the S&P 500 index comprise more than 1/3rd of the index. In other words, a 1% gain in the top 10 stocks is the same as a 1% gain in the bottom 90%.  As investors buy shares of a passive ETF, the shares of all the underlying companies must be purchased. Given the massive inflows into ETFs over the last year and subsequent inflows into the top 10 stocks, a mirage of market stability has been created. 


Is it really wise from a risk management perspective to have nearly 40% of your portfolio in just 10 stocks?  No; the answer is no.  However, if you have any other type of investment allocation, you will underperform the benchmark index. If you have an advisor or manager that matches a portfolio to your financial goals, they will also underperform. 


Negative behaviors lead average investors to deviate from a sound investment strategy that’s tailored to their goals, risk tolerance, and time horizon.  The best way to ward off these negative behaviors is to employ an approach that focuses on one’s goals and is not reactive to short-term market conditions.  It is impossible to simultaneously match an index’s return during a bull cycle and also protect capital during a bear cycle.  Impossible.  





 

Click here to invest with Chad.


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