“Do nothing” is sometimes the best investment strategy

“Sell in May and go away” is a well-known trading saying that warns investors to sell their stock holdings in May to avoid a seasonal decline in equity markets. However, there are too many factors influencing the price of stocks and bonds. Trying to predict what the market is going to do is extremely difficult.

If you are an experienced investor, the term “timing the market” probably sounds familiar. It refers to the idea that investors should buy stocks low and sell them high shortly after. It’s a smart, swift and painless method … or is it?

While timing the market is not a new idea, even professional traders, with all the training, tools and time at their disposal, regularly post losses. Some perform well for a while but it’s very difficult to consistently win over the long term.

Nevertheless, there is no shortage of money managers who claim to know how to beat the odds. You’ll find dozens of stock alert services on the internet, all offering to help you with timing the market. Be warned: the odds are very much stacked against you.

A smarter approach is to spend more time in the market by holding long-term investments rather than trying to time the market.

A perfect example is the recent price movements of Facebook after the privacy scandal involving Cambridge Analytica. The stock price fell from the $185 to $155 in a very short period of time. Many investors panicked and sold. The “Do Nothing” strategy would have been ideal in this case. See the year to date chart below:

Stock traders will argue that selling Facebook and buying it back again when the stock price hit a bottom would have been very profitable. In hind sight, it looks easy but it takes nerves of steel to buy a stock that is in a free fall.

We have all witnessed substantial market upheaval in the past. Many of us have had a window seat to watch how Wall Street responds to uncertainty and turmoil. The financial markets don’t like uncertainty. Why? Because it’s extremely difficult to try to predict the future. Take Tesla for example, lots of uncertainty and turmoil regarding this stock which is illustrated in their one year price chart below.

Odds are more traders lost money then made money trying to trade the ups and downs of Tesla over the past year.

Six tips for portfolio success

  1. The first thing to do is to set up your portfolio in a way that won’t keep you awake at night. For most people, a portfolio of stocks or index funds with some bonds probably works best. A good starting position is to consider a portfolio with 30 percent bonds (government bonds and corporate bonds, for instance) with the remainder in equities.
  2. The second thing to do is stop checking your investments frequently. Two to four times a year is all you need.
  3. Have faith, patience and discipline, markets rise and fall continuously. When they’re down it can be tempting to pull out. Commit to your long-term strategy and stay the course.
  4. Tune out the hypeIf you watch the markets every day and read all the opinions, it will drive you crazy.
  5. Remember that cash is an asset class. Look for buying opportunities when the markets are down.
  6. When in doubt, get sound advice. Even if you’ve decided to buy and hold, you still need to know which investment opportunities are proven performers with a likelihood of continued strength. The right advisor will  help you to wisely diversify your holdings.

 

Disclaimer: I do not own Facebook or Tesla at this time.

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Robo-advisor vs. human advisor

The robo-advisor platforms offered by companies like Wealthfront and Betterment are gaining in popularity. The low cost of investment management services is very attractive when compared to fees charged by human financial advisors. It leaves me wondering if financial advice from humans is on its way out.

Advances in artificial intelligence has already replaced some money managers at companies like Blackrock. Last October marked the debut of an AI powered equity ETF. The exchanged traded fund is run by IBM’s Watson, in other words, the new portfolio manager is a computer program. Most ETFs are passively managed and follow indexes or specific sectors in the S&P 500. The AIEQ ETF is an actively managed security that seeks to beat the market.

Here are four advantages that traditional advisors have over robo-advisors.

  1. Human emotions

Robo-advisors only have one job, to use algorithms to manage your investment portfolio. They are not designed to manage the emotional component of investing and building wealth. For traditional advisors, this is a daily role they fulfill. When markets decline or clients experience an important financial event, the traditional advisor is there to talk them down off the proverbial ledge and help them make a rational decision void of strong emotions.

  1. Accountability

Many people are capable of holding themselves accountable on their own but having someone else committed to helping you in the endeavor only ups your chances of success. Computers are certainly capable of creating tasks and sending you reminders but they have little to no flexibility in helping you devise an accountability system that truly works for you and is tailored towards your specific goals.

  1. Flexibility

Let’s face it; over time our lives can change quite drastically. You get married, have kids, buy a house or become unemployed. The list goes on and on. Each of these events creates what we call “money in motion.” When money is in motion, planning, adjusting and taking thoughtful action needs to occur in order to ensure a positive outcome. Over time, many discussions are required during this process and having a human expert helps you adjust and adapt as needed.

  1. One-size-fits-all vs. tailored service

Part of why robo-advisors are cheap, relative to financial advisors, is due to the fact that they are a streamlined, automated service. As great as this can be, it also creates a lot of limitations. Rather than being built and catered specifically to you and your current financial situation, robo-advisors are designed to serve the masses. This means a somewhat cookie-cutter, one-size-fits-all approach in their offerings.

Traditional advisors, on the other hand, can tailor the services and investment management style they provide according to your unique financial situation. (Insurance coverage, debt reduction, tax plan & estate planning)

Having worked as a financial advisor, I am somewhat bias and prefer the traditional advisor over the robo-advisor. However, a robo-advisor provides a service to a select group of clients and financial advisors provide services to a different group. Each cater to the preferences of their unique clientele.

 

 

Why China will outlast the U.S. in trade war

In the political terms, President Xi Jinping runs a communist country that has just granted him the ability to rule for life. He enjoys advantages that may allow him to cope with the economic fallout far better than President Trump. His authoritarian grip on the news media and the party means there is little room for criticism of his policies, while Trump must contend with complaints from American companies and consumers before important midterm elections in November.

The Chinese government also has much greater control over their economy, allowing it to shield the public from job cuts or factory closings by ordering banks to support industries suffering from American tariffs. It can spread the pain of a trade war while tolerating years of losses from state-run companies that dominate major sectors of the economy. In addition, China is also sitting on top of about $3 trillion in surplus cash.

At best, the American actions could shave one-tenth of a percentage point off China’s economic growth. Not enough to force a drastic reversal of policies, given the enormous benefits that Chinese leaders see in the state-heavy economic model they have relied on in recent decades.

Chinese tariffs on the American agricultural sector is very influential in the Congress. Many states that have voted republican in the past will be hardest hit by these tariffs.

Hopefully the president is just blowing off steam again but, if he’s even half-serious, this is nuts,” said Senator Ben Sasse, a Republican from Nebraska, “China is guilty of many things, but the president has no actual plan to win right now. He’s threatening to light American agriculture on fire.”

In addition to agriculture, China threatened to retaliate with tariffs on American cars, chemicals and other products. The 106 goods, many produced in parts of the country that have supported Mr. Trump, were selected to deliver a warning that American workers and consumers would suffer in a protracted standoff.

The mere talk of a possible trade war has sent investors on a rolling coaster ride of uncertainty. The six month chart of the S&P 500 below clearly illustrates increased volatility.

China also has the upper hand because it holds $1.2 trillion dollars of American debt. Trump’s tax cuts and infrastructure spending will require issuing more debt. The U.S. government has relied on foreigners to purchase treasuries to finance their spending because American saving rates are so low and they can’t participate fully. Add the fact that the biggest buyer of treasuries was the Federal Reserve which has started to sell it’s holdings.

What would happen to the bond yields if China doesn’t buy additional American debt?

The economic law of supply and demand dictates that more supply will cause prices to fall. If bond prices fall then yields will go up, causing interest rates to raise. Wage and price pressures are already rising, higher tariffs would only intensify these pressures forcing the Fed to raise interest rates even more.

A worst case scenario, the talking war turns into a trade war that could slow U.S. growth, tank the stock market and cause a U.S. recession.

 

President Trump is approaching this like does everything else, by talking tough and expecting his opponent to give in. Unfortunately for Trump, it’s not the 80s anymore. China was dramatically underdeveloped then and it wanted access to Western technology and manufacturing techniques. China is relatively mature today and it can easily obtain what it needs from other vendors outside the United States. While the U.S. market looked enticing a few decades ago, Beijing is more interested in newer emerging market countries.

Trump is not only gambling his political future but the financial well-being of Americans if he starts a trade war.

Trudeau is whistling by the Canadian graveyard

According to Wiktionary:  “whistle-past-the-graveyard” is to attempt to stay cheerful in a dire situation; to proceed with a task, ignoring an upcoming hazard, hoping for a good outcome.

In my humble opinion, this idiom describes our Prime Minister perfectly. The Canadian government missed a golden opportunity to respond to the Trump tax cuts in the February 2018 federal budget.  The United States, our largest trading partner, has made investing in the U.S. more attractive than Canada. Corporate tax rates in the U.S. are 5% lower than Canada and more important is the 100% deduction for new capital spending.

The Canadian dollar has fallen in value from $1.2586 at the end of February to $1.3079 today. A clear sign that foreigners are taking their money out of Canada.  The uncertainly regarding the successful re-negotiation of NAFTA is hurting our dollar and is also responsible for the lack of capital spending in Canada.

Our factors that make Canada less competitive than investing in the U.S.

  • Carbon taxes have increased energy costs.
  • February budget increased taxes for small businesses and individuals.
  • Canadian oil is being sold at a discount by $20 to $25 a barrel costing billions of dollars in lost revenue to Canadian oil companies and loss of tax revenue.
  • Kinder Morgan’s Trans Mountain pipeline expansion is being delayed by protesters.
  • Many LNG projects have been scrapped. Meanwhile, this sector is booming in the U.S.
  • The housing market is slowing down due to a 15% foreign buyer’s tax, tightening mortgage rules and higher mortgage rates.
  • Tariffs on softwood lumber, pulp & paper and solar panels. (Steel & aluminium tariffs could become permanent if Trump doesn’t like the NAFTA deal)

No surprise that the Toronto stock exchange is down 4% year to date while the S&P 500 is flat and NASDAQ is up 6%. The Trump tax cuts have already boosted employment and capital spending should kick in the second half of 2018. However, there are still are plenty of risks investing in the U.S. with the Trump circus in Washington. Possible trade wars leading to inflation and higher interest rates.

It is going to be very challenging to make money in 2018!

I am still a Canadian Bear

Trump Tariffs are all about politics and not national security

 

Canada and Brazil are likely to bear the brunt of any tariffs on steel imposed by President Donald Trump. According to the department’s International Trade Administration, Canadian and Brazilian steel comprised 16 percent and 13 percent of U.S. steel imports as of September 2017. China is not one of the top 10 importers of steel to the U.S. (take a good look at the above pie chart)

Top foreign sources of aluminum included Canada (56 percent), Russia (8 percent) and the United Arab Emirates (7 percent) between 2013 and 2016, according to the United States Geological Survey.

In my humble opinion, there is little justification on applying a 25% tariff on steel and a 10% on aluminium based on national security. The majority of steel and aluminium that the U.S. imports comes from military allies.

Now, the timing on this tariffs are somewhat suspect with a congressional election in the 18th district of Pennsylvanian next week. In case you didn’t know, Pennsylvania manufactures a lot of steel. This is Trump country, he carried this district by 20% in the 2016 election. The race is so tight that Trump had a rally in Pennsylvania supporting Rick Saccone.

“Do me a favor,” he said to the large crowd gathered in a hangar at the Pittsburgh airport. “Get out on Tuesday, vote for Rick Saccone, and we can leave right now.”

Trump also using tariffs as a bargaining chip in NAFTA negotiations

Canada and Mexico received a temporary exemption from the tariffs. It will depend on whether the changes that are made to NAFTA will satisfy Trump.  The seventh round of talks in Mexico produced very little process. The final round of NAFTA talks are schedule in Washington sometime in April. The Trump tariffs will put extra pressure on Canada and Mexico to give Trump a deal that will help him get republicans elected this November.

President Trump’s decision to impose tariffs on foreign steel and aluminum likely precedes an exit from NAFTA, according to Goldman Sachs.

Stock Markets don’t like tariff wars

Tariffs will artificially boost input costs and increase the cost of imported finished products. The fear is an increase of inflation, leading to raising interest rates which would dampen economic growth. The other fear is that corporations will be unable to pass on an increase in input prices which could lead to job cuts.

I expect more tough talk on trade from President Trump because many American voters think that the wealthy will benefit the most from tax cuts. I believe that stock market volatility will intensify over the next few months.

 

It may be a good time to raise some cash and pick up some bargains.

 

Shedding some light on the violent stock market moves

Have you ever heard of the saying Be careful what you wished for? It turns out that traders wished to see some growth in average hourly wages, some inflation over deflation and yields on long duration bonds to go up. They got their wish which started a violent market correction.

Market watchers remain at odds over what tripped the sell switch. Primarily, the conversation comes down to fundamental vs. technical. In the days since the correction began the markets have recouped more than half the downside since the low point.

Plenty of theories, I call mine “The Domino Effect”

Inflation fears was the first domino to fall hitting the fear of raising interest rates. The next domino to fall was money managers and institutional investors were caught with a lot of leveraged positions. The sharp fall triggered margin calls causing massive sell orders. This initiated sell orders from funds that use technical analysis better known as quantitative funds. The last domino to fall was retail investors (who haven’t seen a correction in over two years) did some panic selling.

The Dow suffered two drops of 1,000 points. The fall seems big but the actual percentage was not extraordinary. There have been larger percentage drops in the past. In my 35 years of investing, I have experienced some worse percentage downward moves.

Rank Date Close Net change % change
1 October 19,1987 1,738.74 −508.00 −22.61
8 October 26, 1987 1,793.93 −156.83 −8.04
9 October 15, 2008 8,577.91 −733.08 −7.87

 

Is the correction over?

The market fundamentals haven’t really changed. U.S. corporate earnings are getting better and the Trump tax cuts should boost economic growth. Plus there is systematic economic growth happening in both developed and emerging markets.

I am not an expert on technical analysis and I don’t believe in buying or selling based on lines on chart. However, pension funds, hedge funds and quantitative funds use technical indicators to manage a large amount of investors’ money. 

Analysis from Kensho, a quantitative analytics tool used by hedge funds, looked at seven occasions of similarly sharp drops in the S&P 500 beginning in 1987. The study found that following such a drop, stocks tended to fall further, with a median decline of 2.29 percent one week later and a drop of 1.68 percent two weeks later.

 

This is the ABCD bullish chart:

This is the year to date chart of the S&P 500:

In my humble opinion, corrections tend to last more than nine days. I put some money to work last week and plan on dollar cost averaging on some more positions. If you are new to my blog, consider reading:  Dollar-cost averaging using an option strategy

What do you think? Are you buying the dips or selling into the rallies?

Market crash or correction could be a good time to buy

 

 

My blog post last week warned of a possible correction due to Trump’s future withdrawal from NAFTA. I believed that a pullback was in the cards but you never know what will trigger a sell off.  The pullback started to get some steam on Thursday afternoon when the Atlanta Fed released their projections for first quarter GDP growth to come in at 5.4 per cent!

That really spooked the stock market since 4th quarter GDP was only 2.6 percent which was below consensus estimates of 3 percent. The Friday’s job numbers fueled the downdraft even further as investors digested a stronger-than-expected jobs report where the average hourly wages rose more than expect.

Higher wages can point to higher inflation, which, in turn, could lead the Fed to raise interest rates more aggressively. Those concerns allowed the 10-year Treasury yield to rise above 2.8 percent.

Keep in mind that the S&P 500 has risen 6 percent in the year to date and is on track for its 10th straight month of gains. At these levels, this would be the best January since 1997. The S&P’s relative strength index ended last week at 90, its highest level on record. (Overbought territory) Its price-to-earnings ratio hit 18.44 times forward earnings this week, its highest level since May 2002.

Two other factors that may have contributed to the main benchmarks suffering their biggest one-day drops in more than a year and posting the steepest weekly losses in about two years.

  1. Friday marked the last day for Janet Yellen as the head of the Federal Reserve, giving way to her successor, 64-year-old Jerome Powell. Powell’s entry adds uncertainty into the markets.
  2. The politics in D.C. with the release of the Nunes memo adds political uncertainty as to whether the business friendly republicans will lose in the November elections.

The Dow Jones futures market points to a negative opening on Monday. There could be even more selling pressure near the end of the week because of a possible government shut down over Trump’s immigration demands.

Why you shouldn’t worry

  • The Atlanta Fed was also optimistic about the 2017 first quarter, estimating growth at one point to be 3.4 percent, where the final reading came in at 1.2 percent.
  • Higher wages doesn’t always lead to higher inflation. Consumers could opt not to spend but pay down debt or increase their savings.
  • Over the long run, good quality stocks will outperform bonds.

In my thirty plus years of investing, I have seen many bear markets and corrections. Ask yourself a simple question. How many millionaires do you know that became wealthy by investing in savings accounts?

What is on my shopping list? U.S. financials and technology.