NAVIGATING WAVES OF UNCERTAINTY
Risk on, risk off. I sometimes feel as if I am watching a “clap on, clap off” commercial. I mentioned when I last wrote that slow growth, uncertainty, volatility and a substantial correction were all likely. We’ve seen all of that.
Since my last correspondence we have navigated this wave of uncertainty by taking profits and raising our cash and ultra short term bond positions. In early April we followed up our technology related stock sales with two additional moves to reduce US and global stocks and convertible and high yield bonds. In early May we quickly cut our global stock exposure after the anti-austerity votes by the Greek and Dutch. Especially problematic was the ouster of France’s leader and his replacement by a “socialist” politician. While I don’t feel austerity alone can solve Europe’s problems, or the US’s for that matter, the jettison of Europe’s current plan without a credible replacement could create a shock – hence the wave of uncertainty. We also have reacted to the softer US data points that have emerged this Spring.
So where are we now? Taking profits and reducing risk have paid off. By early June major stock market averages had given back all or most of the year’s gains. We were able to mute the effect of that negative wave of uncertainty considerably.
What are our biggest concerns? Policy risks!! – not just from European leaders, but from our own. If no actions are taken by year end, we face a fiscal cliff. A 600 billion dollar tax hike will hit Americans. Ouch! And energy, food and other commodity speculation is still rampant and damaging. Economists say in theory that speculation doesn’t change prices over the long haul, but they can cause 20% distortions in current prices. If gas prices are $.75 or $1.00 higher per gallon than real demand dictates, and that happens every time it looks like the economy is starting to gain some momentum, it steals the average persons discretionary income in a big way. It robs them of money they should be spending on automobiles and televisions. And when those prices persist until it looks like we are maybe headed back into recession, consumers change their behavior. They cannot, or will not, commit to major purchases, like buying houses and instead continue to worry about their jobs.
Where are we headed next? Down the same road but the next wave is probably up. Gas prices are currently down almost 25% from recent peaks. Consumer spending will likely strengthen data points in the coming months — at least until they get squeezed again. Europe has no choice but to address their issues now. They need a fiscal union, not just a loose monetary one. At a minimum, they need coordinated and supportive banking policies to prevent runs on banks and to deal with poorly capitalized ones. But solutions are achievable.
And what about our US politicians? The Governor Walker recall election results seem to indicate that spending constraints are supported by US voters. Now if only we can get support for raising additional revenues, in my opinion best done with a national sales tax, we might actually get on a sustainable fiscal path ourselves.
So, prospects for higher growth are really possible. Housing prices appear to have stabilized in most areas of the country. In the absence of any major shocks … you get the idea.
In closing, after May’s pullback we recently added to our consumer discretionary position. Once again, America’s amazing consumers are the engine that’s powering the global economy. We remain cautious but alert at the wheel. Hopefully gas prices will behave so we all can enjoy the summer driving. But don’t forget to wear your seat belt, just in case.
Donald J. Phillips, CFP®
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.