Scott Kahan: How much volatility does Trump add to the market? 

Scott Kahan: How much volatility does Trump add to the market?  In our fourth annual Investment Forecast from Scott Kahan we discuss Trump, China, Fed Chairman Powell and why we’re in a better place after all that ugly business last year. Scott is a Certified Financial Planner, and President of Chappaqua’s Financial Asset Management Corp.

As I look back at your annual forecasts, I see the market is always worried about something.

That’s because we’re hearing from people who are paid to worry. But the average person doesn’t need to, and in fact, shouldn’t concern themselves with the financial talking heads, the conflicting narratives and the walls of worry that emanate from Wall Street.

Our mantra is that financial planning takes the emotions out of investing. The main elements of the plans we develop with our clients are 1) we know where we’re going – what we’re investing for and when we will need that money 2) we allocate equities and fixed income securities within our portfolios to match our goals 3) we rebalance our portfolios when either stocks or bonds become too heavily weighted within them.

What is “the street” worried about now?

The market saw tremendous volatility in Q4 2018 and that worried investors. A little perspective is constructive here. Remember the stock market went straight up in 2017. Last year it was all over the place. And December headlines were grim – the worst December since the Great Depression. Now we’re having a great January. For most people markets can swoon and bounce back before they have time to react.

Professional investors who try to time the market around expected price-movements are relying on guesswork. For the average investor it’s often worse, because they are usually trying to trade on yesterday’s headlines. That’s a prescription for buying high and selling low.

Consider a long-term investor, with a portfolio invested in 65% stocks and 35% bonds. As the market climbed in 2017 the growth in their stock portfolio outpaced their fixed-income assets. It’s tough for the average investor to sell their winners. So they wait until fear strikes like in December.

But if you were working with a financial plan, a 10-15% increase in your portfolio’s stock allocations, something that would likely have happened, would trigger a portfolio review. And you would sell stocks to reweight your portfolio at 65% equities. Now you’re trading in response to your portfolio’s signals rather than trying to time the market. That’s how you take the emotions out of investing.

What caused the volatility?

Fed Chairman Powell’s speech on October 3, when he signaled three or four more rate-hikes concerned money manager who wanted to hear more “market-driven” language. They were also concerned about  the Trump/China “trade war”. Trump chimed in on each with his famous tweets, and you know, I wonder how much volatility Trump adds to the stock market.

Today, its a different movie. The Fed announced they are keeping rates stable and will be “patient” with future hikes. So the market is up 435 points. Nobody knows what happens with a China trade deal but they’re negotiating and that’s good. I believe we’ll get one, because it’s in everyone’s interest.

So, it’s “all good” and “straight up” again?

It’s good for now. But, we may be looking at a short-term rally and we could revisit the December lows. Because the real concern is recession? At 8 years and seven months we are in the third longest expansion ever. Only the 1961-69 and 1991-01 expansions were longer. Eventually they all end.

The good news is, we don’t see a recession until 2020. We may continue to see signs of a slow down in 2019 but it will be like decelerating from 90 mph to 70. We’re still moving forward at a decent rate. Let me emphasize, we are not talking about anything like the recession of 2007-09. It may be that certain sectors underperform and others do well.

What could trigger a recession?

It could be bad news on China or interest rates, or the current expansion could just die of old age. Typically periods of high growth lead to low unemployment, rising wages and inflation. Then the Fed raises interest rates to slow the economy down. But it’s been said that putting the brakes on an economy is like trying to dock an air-craft carrier without touching the dock.

In December, Powell was looking at Q2 GDP growth of 4.2%, and unemployment at 3.7%. Those are typically signs for the Fed to tighten monetary policy. But we’re not seeing wage inflation. Perhaps because there’s still a lot of part-time and discouraged workers. The U6 unemployment rate, which factors them in, is still 7.6%. So there was concern about what Powell was looking at and the market sold off.

We’re in a better place now. The Fed has more leverage to use to fight recession, asset prices are more reasonable and with money market rates over 2%, pressure is off the average investor to chase high asset prices.

So what do investors do if there’s a recession?

Louis Yamada’s Historical Interest Rate Chart

The classical definition of recession, two quarters of negative growth, is by nature a backward looking indicator. Many times you don’t know you are in one until you are coming out of it. Because the stock market is a forward indicator, it can drop and rebound before you even know you’re in recession.

Remember, recessions are short. Recoveries are long. We are in a rising interest rate cycle but rates rise gradually and on average take thirty years from bottom to top. If you are an income investor, manage your money from a total return standpoint. If you are in your 60’s or 70’s you still need some growth – stay short term on fixed income and allocate a portion of your portfolio to growth assets.

Long-term investors should be looking to maintain their allocations on a regular basis. Not a daily basis. You don’t have to re-allocate every time the market drops 3%. When stocks fall you have a buying opportunity. Look at the sectors in your portfolio for rotation when there are buying opportunities but your portfolio is still properly weighted. Last year small cap and foreign stocks got hit while US large cap stocks did well. So we took our profits there and rotated into small cap and foreign funds at sale prices.

How did your clients handle the December correction?

My clients are disciplined, long-term investors. They don’t get too carried away with daily market gyrations. And the further we get away from 2008, the less they are concerned. We sent a “stay calm and carry on” letter to our clients in December and most of them just said, “thanks”. One wrote, “Gee, I wasn’t worried until you sent me this letter.” That’s where you want to be. If you’re not there call a financial planner.

Financial Asset Management Corporation has provided fee-only financial planning and wealth management services for individuals and small businesses in the Tri-State area since 1986. They serve 150 clients and manage over 200 million dollars in assets. FAM Corp. President Scott Kahan is a Certified Financial Planner professional. (Financial Asset Management Corp., 26 South Greeley Avenue, Chappaqua, NY, (914) 238-8900; www.famcorporation.com)