Markets took a sharp nose dive this week, and then recovered quickly, as news of Italian political turmoil dominated the headlines. It was yet another reminder that Europe’s economy is far from stable, its politics even less so, and King Dollar remains the only safe haven from world calamity. We live in an age of chaos, are you sufficiently risk averse with your money?
What is that chaos? A post-9/11 world no longer ordered by American hegemony or leadership. A global financial system linked to the dollar, which is in turn heavily indebted and still recovering from the 2008 banking collapse. A US financial system with little fiscal discipline and overly reliant on bad monetary policy of low interest rates and money printing. It is not a global environment conducive to economic growth or stock market gains, yet that is exactly what the US has enjoyed since 2009.
There is some really good financial news of course: unemployment dropped to 3.8% … labor participation is increasing … the number of jobs added exceeded 200K and exceeded analysts expectations …
But as we have discussed in previous blogs, the Treasury yield is close to inversion … emerging markets are in turmoil as the dollar strengthens … oil is elevated year over year … no end to the Middle East conflagration … and now, another EU political drama, this one in Italy.
This is why more analysts are seeing “risk aversion trades” in individual investor portfolios … those stories dominated the financial news this past week.
What is causing this risk aversion, and what could possibly keep it from driving markets down?
I.Top 3 negative “chaos” issues driving risk aversion in the market:
- “Italian political drama”: Very long-story short – anti-Euro parties won elections in March. The current Italian government does not want them to take power. But the current government cannot form a new coalition, leaving the country in turmoil. Either the anti-Euro parties form a government, a new coalition is established, or more elections are held in July. Italian voters are sending a message like Brexit did in Britain: they don’t want the Euro. The downward effect on Euro stocks was dramatic, although they recovered within 24 hours. Bottom line – traders are becoming more skeptical, not less, that the Euro project can survive, and are making investment decisions based on that belief.
- “Fed rate hike is looming in June”: Most analysts are reading the tea leaves and believe the economy’s strength will result in a rate hike of at least 25 basis points this upcoming month. Rates going up will drive savers into safe investment assets. This should slow down continued stock market gains.
- “Trump trade negotiations are not succeeding”: The President will claim success, but we are getting nowhere with NAFTA renewals and our trade negotiations with China. While China, Canada and Mexico have WAY more to lose than we do, any tariff or tax sanction will be reciprocated and that will harm economic growth. Lower growth means lower profits, lower profits mean a lower stock price.
II.Top 3 positive economic issues which could off-set the risk aversion “chaos” trade:
- “Economy at historic highs”: Exports up, imports up, employment at all time record highs, taxes down…..the economy has taken off contrary to the predictions of the pundits, and lasting longer than anyone would have believed. The headwinds are obvious, but there is no debating that passing fundamental tax reform, and eliminating regulations, has created market stability not seen since the late 1990s.
- “Dollar gaining strength”: While a strong dollar can be a headwind for exports, it does increase consumer demand and spending on imports, and usually translates into profits and a strong labor market. With unemployment at the lowest levels in 20 years, labor participation increasing, and consumer confidence sky-high, global “chaos” has not translated into GDP weakness here at home.
- “Household net worth at its highest in a decade”: total US household net worth exceeded $100 trillion for the first time ever this past quarter and continues to rise. Average household income rose above the pre-2008 level for the first time as well, rising to $61K for a family of four. The wealth accumulation was also more broad-based, accumulating at the middle and lower income levels and not just in the top percentiles.
It is amazing what capitalist confidence can do!
Make no mistake, we are living through an era unlike any other: North Korean crisis … rising China … a brewing hot war with Russia … Middle Eastern catastrophes … the age of terror … European uselessness … a unsecured southern border awash in drug cartels and human misery … an unparalleled sense of chaos abounds throughout the world.
Here at home, we face the age of Trump, unprecedented societal division, and rampant fiscal recklessness and debt. There are signs of promise – low rates of unemployment, and a super-charged economy – but the question is whether the good times can offset the bad.
To avoid this constant tug of war between the good news and the global concerns, get your portfolio in a principal protection product. Call now! 877-912-1919