Navigating Today’s Market Storm

In the midst of a very turbulent global markets, your portfolio is in the driver’s seat. Why? Because the All-Climate Portfolio is presently positioned “inverse” both domestic and international markets.  In short, the portfolio is gaining in value as markets fall.

In the overall scheme of things, the decline in commodity prices, the devaluation of the Japanese Yuan, as well as recent “dovish” Fed remarks regarding the possible raising of interest rates are significantly adding to the downward pressure in global markets across the board.


What’s next?
The greatest fear amid a sharp pullback is whether it is not just a correction of excesses but the harbinger of a bear market; there really is no way to know for certain.And you must be wondering, why is this happening?

Well, as mentioned above, it’s China and it’s the Fed. Both are creating a storm in the markets.
China’s currency devaluation, on the back of erratic stock-market volatility in recent weeks, has scared the world into thinking that China’s growth is slowing dramatically faster than expected.

Meanwhile, the world is also coming around to the view many have been espousing for a few years: The Fed simply can’t raise interest rates now. Doing so would create a world of hurt globally. Asian countries, in particular, have taken on substantial U.S. debts amid the ultra-low interest rates on the dollar. If the Fed begins to move rates higher, then the cost of debt repayments would go up. That, in itself, is problem enough … but the real issue is the dollar.

The dollar has been rising since about 2011 for two primary reasons…

First: U.S. GDP growth expectations have outstripped expectations for other developed economies. That attracts money to the dollar.

Second: Expectations that the Fed would make good on promises to raise interest rates added further strength because of the way currencies work. If an investor can earn a greater return in dollars than in euros or yen, then money piles into the higher-yielding currency.

If the Fed were to raise rates next month, the gap between dollar yields and those on other major currencies would widen, and money would pour into the greenback … and that would mean that Asian countries and companies with dollar debts would have to spend even more local currency to buy the dollars they need to repay their debts. That could threaten — or even instigate — a currency crisis in some country that spills over regionally or even globally.

Thus, the tantrum we’re seeing in global stock markets.

What It Means for Us

First, allow me to remind you that the All-Climate Portfolio is market neutral, meaning, it’s design does not depend on a rising market to be profitable.  Risk of loss is greatly mitigated through the use of “inverse” mutual fund exposure.  The active management techniques utilized in the money management process can mean a great deal to the investor during turbulent and downward pressure periods such as what we are experiencing today.

While I am not overly concerned about a crash, I can see the S&P 500 potentially drifting lower, as I’ve expected all year.  In the meantime, I am not convinced that China’s devaluation is the sign of a sharper-than-expected slowdown in the Chinese economy. It could end up being a knee-jerk judgment. The yuan is a pegged currency, with the dollar as the primary peg. Because the dollar has been rising in value against just about every major global currency in recent years, the yuan has been rising as well — not because it should but because the dollar is forcing it higher.  That helped squeeze China’s economy in recent years because it made Chinese goods less competitive globally, hurting its much-watched manufacturing sector.

By devaluing the yuan, China has released some of the currency pressure impacting its economy. It could be argued that we could see China begin to report GDP numbers by the end of the year that make observers happy, which would lead to an about-face in emerging markets.

As for the Fed … this stock-market tantrum has taken a September rate hike off the table completely (in my opinion). The Fed would be fueling disastrous consequences if it raised rates in the next few weeks.

Actually, I think a rate hike is off the table until next year — at the earliest. And we could hear the Fed say as much after the September meeting. Fed governors could very well announce that they want to see greater stability in the global economy before acting here at home for fear that their actions could impact employment — and the Fed is all about employment these days.

So while this stock market sell-off is certainly numbing and nerve-racking, it could possibly be a short-lived moment… and the All-Climate Portfolio is on the right side of the fence at present.  Regardless of direction (up or down), however, the All-Climate Portfolio is designed to mitigate risk while striving for reasonable performance.

Thank you and as always, please feel free to contact us with any questions or concerns.

Greg
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