2016 Q3 Review Q4 Preview

Politics, Social Media, Emails and the Economy

I do not remember a time when 3 months seemed both so long and so short.

After almost a year of political infighting amongst the primary candidates of both major parties, both the Republican and Democratic nominees were decided.  The nomination of both parties’ candidates did not come without some serious questions of ethics or drama as both the Republican and Democratic conventions were on display for all to see on national television.

The Republican convention saw Texas Senator Ted Cruz address the conventioneers and not provide a formal endorsement for their candidate, which elicited an immediate contentious response to Senator Cruz.

The Democratic convention was disrupted before it even began with the WikiLeaks release of emails showing the collusion between the DNC chair Debbie Wasserman Shultz, the media and one of the primary candidates.  As a result, DNC chair Debbie Wasserman Shultz resigned days prior to the beginning of the DNC convention.

Amazingly, who would have guessed these events would be like the undercard of what has become a major heavyweight fight for the President of the United States.

If you are a news junkie like me, then you cannot help but feel overwhelmed by the harsh partisan political warfare being waged daily by all the major cable news media.  More partisan are the social media outlets (Facebook and Twitter) who give voice to the people, who in turn engage in their own partisan political warfare with their family and friends.  The unfortunate outcome is that 1 out of 14 citizens have lost a friend during this election cycle.

I pray this has not happened to any of you.

The following quotes are to provide some insight and belief in our way of life.

“America will never be destroyed by the outside.  If we falter and lose our freedoms, it will be because we destroyed ourselves.”  — Abraham Lincoln

“Darkness cannot drive out darkness; only light can do that.  Hate cannot drive out hate; only love can do that.”  — Martin Luther King

Political Outcome and Interest Rates

So as I write this quarterly newsletter, we are 8 days from electing the 45th President of the United States.

Regardless of the outcome, the sun will rise and set as predicted by the Farmers’ Almanac and we the people of the United States of America will still be part of the best country and economy in the world.

More important is how the markets will react to the Federal Reserve’s desire to raise interest rates.

Unlike any time in the past, both the equities markets (stocks, mutual funds, etf’s) and the bond markets (federal, municipal and corporate) have been affected by the 6 plus year prolonged low interest rate environment.

Equity markets have enjoyed continued growth due to low interest rates, however, as we noticed earlier in Q1 2016, the effect of a 25 basis point increase in December 2015 caused a 17% decline in the equities market.  Only after the FED informed the markets in late February 2016 it would not seek to raise rates again in March did the equities market recover.  Since then, we have seen the volatility in the markets increase in May  and August due to the fear of the FED potentially increasing the rate.

Bond markets are currently overvalued due to the impact of low interest rates on banking CD’s, Treasuries and other non-market risk investments.  Investors are seeking greater yields on their investments and have turned to higher risk corporate or municipal bonds.

With the prospect of higher interest rates looming after the election is complete, I expect both the equities and bonds market prices will see a loss in value.

For equities, the loss of value could be similar to what we saw in January and February of 2016.

For bonds, the loss of value will be based on the credit rating and the duration of the bond.  

What LFG is doing

Our risk mitigation strategy began in September as I began to sell positions with a higher Beta (risk) with the money going to cash.  Normally, I would consider going to an alternative sector or a lower duration bond exchange traded fund, however, in anticipation of a FED interest rate hike and the pending election, I felt a larger cash position was warranted.

Going forward we will continue to:

  • Manage to the investment plan – invest to meet the identified goals.
  • Mitigate risk by moving out of higher Beta (risk) investments to lower risk or no risk investments.
  • Seek shorter duration bond and other fixed income exchange traded funds.
  • Invest in individual equities where there is both an opportunity for growth and dividend income.
  • Service our clients to the best of our ability.

I repeat this from my last quarterly update…

True, free elections aren’t always neat and tidy, but history strongly suggests they are a vital ingredient for long-term economic success.

I hope you’ve found this review to be educational and helpful.

Thank you very much for the trust and confidence you’ve place in my team and my firm.

Respectfully,

Jeff Leonard, CERTIFIED FINANCIAL PLANNER Professional

 

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