After a phenomenally performing 2017 we’ve found ourselves in a year that’s been somewhat difficult to navigate. There are several very positive economic indicators – however, we’ve also seen a fire storm in the media regarding politics, foreign affairs, tariffs and trade. Corporate profits have never been higher due to economic positioning from prior US administrations and tax cuts from the current administration – along with deregulation and the prospect for a less responsible, though, possibly more profitable future. Consumer spending continues to rise, unemployment continues to drop, and yet markets stayed stagnant with the first two quarters of this year only returning 1.67% (S&P 500).
So why has the market been flat in a time of clear economic prosperity? Our thoughts are below alongside how we are positioning investments to mitigate the volatility while working to capture gains as we move forward.
Political Influence
While most of the current administration’s actions have been focused on economic growth, deregulation, tax cuts and trade, their rushed approach, tumultuous dealings with foreign countries, a revolving door of administrative heads, possibility of trade wars, and war on immigration have certainly put a strain on market performance.
Consolidation
Consolidation is a term most money managers are quite familiar with – however, it doesn’t often get discussed in the media as a reason for stagnant markets. This is likely because knowledge of it combats anxiety about the market and, as we know, the media thrives on fear. Understanding consolidation periods is crucial when determining whether an investment is going to go higher, lose value or do nothing. A firm grasp of it helps us to capture gains at the right time, avoid unnecessary pit falls and avoid down markets or poor investments.
A consolidation period occurs after an investment (or the market as a whole) gains or loses value. Nothing will go up, or down, forever. There is always a consolidation period in between.
Consolidation periods come in two forms – “time correction” and “price correction” – both with different outcomes. Both occur over time, however, a price correction results in far greater loss of value, while a time correction results in the price remaining in a tighter ranger for a longer period of time. The below image illustrates these two types of consolidations.
As you can probably gather from the image, our current consolidation period is more closely associated to time, rather than price. Price correction occurs more often in times like 2008, when the market was severely over-valued and pillars of the economic system were collapsing. That’s not what’s happening this year – we are in a time of great economic prosperity which should result in the market going higher once it has had a sufficient period of “time consolidation” after a year (2017) of excellent market return.
Poor returns in foreign and Emerging Markets
We’ve seen some volatility in foreign and emerging market investments. This is often tied to some kind of systemic economic issues in the region, though this isn’t necessarily the case right now. Largely, the volatility we’re seeing is coming from the “currency effect” on share values due to a strengthening US dollar. What exactly do we mean by that?
When considering the Exchange Traded Funds (ETF’s) we utilize to capture foreign and emerging market investments (similar to mutual funds or ADR’s) – shares of foreign stocks are denominated in the home currency on the stock exchanges where the shares trade – in this case, the New York Stock Exchange (NYSE). When the share value converts to dollars, a weaker dollar means the foreign currency buys more dollars and the shares are worth more denominated in dollars. Conversely, when US currency is strengthening the share values are worth less since the foreign currency buys less US dollars. This effect occurs on dividends being paid by these investments as well.
Data published by Charles Schwab for the 10-year period from the start of 2000 through 2009 (when the dollar was weakening) shows the effect boosted returns on foreign stocks by 7 to 18 percent (depending on the allocation) over the course of a year.
Unfortunately, we are seeing the opposite effect right now. The US dollar is strengthening while others stay stagnant or weaken. This results in an exponentially lower/negative return on investment.
AllOneWealth’s plan of action in the coming months
We’ll always continue to focus our investment strategy on investing long-term in companies that are fundamentally sound with an advantageous product/service pipeline seeking to add more value for their customers. And, of course, isolating companies that focus on a responsible social and environmental impact.
But when it comes to financial return, that’s not enough – we need to practice the discipline of “buy low, sell high.” Buying low is best executed in consolidation periods like we’re in today. Though this is not an exact science, we do our best to buy near the bottom of the consolidation range and hold for the long-term the companies we believe in once this “time correction” has ended.
To combat volatility we’ll be moving away from foreign and emerging markets until we see the currency effect shift in our favor while continuing to invest in US based companies that have global reach so that we can take advantage of a growing global economy.
Please feel free to reach out to us with questions – we love hearing your insight on the market and feel we all have unique knowledge that can help to create more value and profit.
