Market Strategy: Can You Take the Risks?
Market Commentary | May 2017
The President of the United States is setting the world’s economic agenda because of his extraordinary spending and tax plans.
Trump came into power claiming that the unemployment rate in the US was really over 20% and not the 4.9% that the US Labor Department had posted, that the US economy was in a depression and not growing by 3%+ per year, and that he could stimulate growth to get workers back to work and make large tax cuts while not increasing the US deficit.
Trump said he would bring in a budget to spend a trillion dollars over the next 10 years to rebuild roads, bridges and airports in the US while cutting taxes on the very rich and the middle class. This spending and tax cut proposal dwarfs any other plan in the history of the Western world. It has a larger impact than it normally would because we have just come through an abnormal economic period that began in 2008 where interest rates have been pushed to their lowest levels in history, more government money was used to bail out more companies than ever before, and energy prices fell dramatically. All these measures on their own can be compared to gathering of dry firewood in record amounts. We had just started to see some smoke. Trump’s plan is comparable to throwing tons of gasoline on the small flames we began to see.
But Trump’s plan is fraught with problems.
Traditional economics teaches us that if a government increases spending that much when the actual unemployment rate is below 5% and when the actual growth rate in the economy is above 2%, the result is inflation and this level of inflation could be very high.
We actually need some inflation in the world economy in order to attract money into real assets and out of bank deposits to get growth going again. Hence the relief in the last few years that we were finally getting some growth started. However, very high, long term inflation is bad for the economy and this may be the end result of Trump’s plan if he succeeds.
But let’s deal with the short term. In response to Trump winning the election, stock prices have moved up, in particular sectors, in anticipation of the spending. The risk though is that any potential change to either Trump’s opinions, plans, or the ability to implement them could result in a major market fall. Many thought that with a Republican Senate and Republican Congress, there would be swift approval of Trump’s policies but that has not happened - his Obamacare replacement being the latest debacle.
In addition, Trump seems to thrive on controversy and brinkmanship. In the coming months we can expect a showdown between Trump and Congress and the Senate over a number of topics, not the least of which is the potential shut down of the US government similar to the shutdown of 2013 as well as the budget and tax cut debates. These are issues we can see coming. Then there are always the crises that no one sees coming. It is not unrealistic to expect that wars, scandals and pandemic fears will arise in the next few years as they always have. We expect that the markets will swing violently during these periods, more so than they have done in the past.
We also have to deal with a very brittle stock market in Canada. Let me unwrap that term for you.
In the 2012 book we wrote about how most large mutual funds and pension funds could only purchase 44 stocks in Canada because the size of these funds is so large that buying or selling the 45th stock in any significant amount would drive its price up or down so much that it would prevent the purchase or sale being worthwhile. However, since 2012 we have seen times when the purchase or sale of all 44 stocks in Canada become very difficult simply because most funds are buying and selling the same stocks at the same time. This exaggerates market gains and, for those worried about losses more than gains, it amplifies the losses. Most importantly, during large market declines or even a fear of a decline it could prevent these large funds from being able to sell at all.
This is most important during times when there is panic in the air such as 2008 or more recently in January 2016. We cannot overstate this risk enough and we believe that most investors and many investment advisors are not aware of it. In January 2016 we saw the Canadian dollar fall to 66 cents American, oil drop to $26 a barrel and the Canadian market decline by 20% yet we saw very few money managers sell. One could argue that it was then too late to sell and that one should hold on but if the market had kept dropping as it did in 1998, 2000 to 2003 and in 2008, isn’t there a point where action is required?
Can you afford a 2008 style crash in your accounts? The answer is no and that is why we took action in January 2016.
We want you to be our client for many years to come and not just this year. We believe what you are looking for us to do is beat the savings rate at the bank, not lose the money and not give you a reason to worry. We will not always get the selling point or the buying point right but we have been able to avoid the debilitating market falls of the past and still produce good, sound returns.
Presently, there are good opportunities arising particularly in innovative companies and we are very selective in our purchases and the upcoming volatility will uncover some great stocks at cheaper prices. However, safety is our primary concern and the only strategy one can adopt during these times is vigilance and willingness to risk being wrong and selling in a falling market in order to protect our clients’ capital.
We look forward to discussing this at our next chat.
This article was prepared solely by Larry Short who is a registered representative of HollisWealth®, a division of Industrial Alliance Securities Inc. (iA Securities), a member of the Canadian Investor Protection Fund (CIPF) and the Investment Industry Regulatory Organization of Canada (IIROC).The views and opinions, including any recommendations, expressed in this article are those of Larry Short alone and not those of HollisWealth®
BComm, CPA, CGA, CIM®, CFP®, FCSI
Portfolio Manager, Executive Director, Private Client Group
HollisWealth, a division of Industrial Alliance Securities Inc.
Hollis Insurance Inc.
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HollisWealth® is a division of Industrial Alliance Securities Inc. (iA Securities), a member of the Canadian Investor Protection Fund (CIPF) and the Investment Industry Regulatory Organization of Canada (IIROC). iA Securities is a trade name and business name under which Industrial Alliance Securities Inc. operates. This information has been prepared by Larry Short, Portfolio Manager for HollisWealth®, a division of iA Securities, and does not necessarily reflect the opinion of iA Securities. The information contained in this document comes from sources we believe to be reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any the securities mentioned. The information contained herein may not apply to all types of investors. The Portfolio Manager can open accounts only in the provinces where he is registered. For more information about HollisWealth®, please consult the official website at www.holliswealth.com . ShortFinancial is a personal trade name of Larry Short.
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