STA Weekly Report – Let’s Hope Global Central Banks Know What They’re Doing
Written by Luke Patterson | Friday, July 26th, 2019
INSIDE THIS EDITION: Let’s Hope Global Central Banks Know What They’re Doing 10 Steps to Build a Stronger Portfolio Ahead of Volatile Times Weekly Snapshot of Global Asset Class Performance CBO Report Looks at Effect of Raising the Federal Minimum Wage 401k Plan Manager
Maybe it’s just me, but I find the sudden dovish turn by global central bankers to be somewhat puzzling. And a little disturbing. Mario Draghi this week signaled that the ECB was ready to lower rates in September for the first time in three years; and resume its bond buying (QE). Most yields in the eurozone are already in negative territory.
The reason being given is that the eurozone economy remains
dangerously weak and needs more stimulus. The problem is that negative rates
haven’t boosted its economy or inflation. Yet it’s now ready to push yields
even deeper into negative territory. That hasn’t worked so far. So why keep
Central bankers in Australia, South Africa, and South Korea (among
others) have already lowered rates this month. And the Fed is expected to do so
next week. The Fed apparently believes a pre-emptive “insurance” rate
cut is needed to prolong the economic expansion which is the longest in
history. That insurance is needed because there’s little monetary ammunition
left when a recession finally does hit. That’s because interest rates are
already near the lowest in history. Who put them there? The same bankers that
are now concerned that they’re too low. So, their solution now is to lower them
even further. Which begs the obvious question. With all their monetary
ammunition used up, what are they going to do when the next
inevitable recession finally hits?
10 Steps to Build
a Stronger Portfolio Ahead of Volatile Times
Although markets have not exhibited dramatic spikes in
downward volatility during 2019, that does not mean that volatility will remain
Think about last year when the market had a great first half
and then suddenly hit two patches of drawdown during the fourth quarter. As a
result of the market’s potential for sudden shifts in sentiment, it is
important for an investor to build portfolios that will be stronger and better
hold up during those periods. So how does an investor do this?
10 Steps for
building a stronger portfolio ahead of volatile times
Keep a long-term view, don’t let short-term market volatility blur your vision. When planning for retirement, investing should be a marathon, not a 100 meters race. In fact, when taking a long-term view, it allows you to be more opportunistic and take advantages of the volatility.
Understand your financial situation and align your portfolio with your risk profile so you can sleep comfortably at night when market volatility returns.
Assess your portfolio and make necessary adjustments when markets are calm and stable.
Stay invested but also watch for the downside and play defense. Chasing returns is obviously dangerous. Especially when we are in the late stages of a business cycle. However, staying on the sidelines for too long is not only costly with ultra-low interest rates but may also undermine your long-term investment objectives.
Let your personal headlines instead of the news headlines influence your investment decisions. To do this well, have a plan and stick to a discipline.
Build a stronger portfolio by diversifying globally, increasing exposure to higher quality and defensive assets, adding alternative investments that diversify your portfolio for the long term, and rebalance when allocations drift away from their targets.
Make cash work harder when the Fed keeps interest rates above inflation.
Understand your future liquidity needs and make sure these needs are built into your portfolio. The 2008 Financial Crisis was largely driven by reduced liquidity. Liquidity can disappear when it is needed most, so know your future liquidity needs so you know you won’t be a forced seller when crisis strikes.
For income investors, have diversified sources of income that properly balance interest rate risk and market/credit risk.
Embrace a “total return” investment mandate. The combination of low interest rates and an aging population that is only growing, makes income generating assets both desirable and expensive. A total return approach however, is indifferent to income and price gains and thus may be more appropriate. After all, dividends can be synthetically generated from the sale of appreciated assets in a tax efficient manner.
All Country World Index Tests Previous High
Global stock indexes are once again testing overhead resistance barriers.
The weekly bars in Chart 1 show the MSCI All Country
World Index iShares (ACWI) in the process of testing its previous
high set at the start of 2018 (see red circle). Any test of a prominent
previous peak always bears close watching. Weekly momentum indicators also
suggest a potential overbought condition.
The 9-week RSI line (top box) is nearing
overbought territory at 70. While the 14-week slow stochastics
oscillator (middle box) is already well into overbought territory over
80. That doesn’t mean that the ACWI won’t clear its 2018 peak. It just means
that global stocks have another chart barrier to overcome. More than half of
the ACWI (56%) is comprised of U.S stocks (which have already hit new highs).
Foreign stocks (which are lagging way behind the U.S.) are holding it back.
Foreign Stock Index is Also Testing Resistance
The weekly bars in Chart 2 shows the MSCI All Country
World Index ex US iShares (ACWX) lagging way behind the ACWI in
Chart 1. That of course is because the ACWX doesn’t include the U.S. which is
the strongest market in the world. Chart 2 shows us what the rest of the world
(which includes foreign developed and emerging markets) looks like. And it
looks much weaker. That shouldn’t come as a surprise because weakess in foreign
economies is one of the main reasons that global central bankers in the
Asia-Pacific region, Europe, and the U.S. are starting to lower interest rates
again. And that weakness is reflected in weaker stock markets.
Chart 2 shows the ACWX up against some potential resistance of its
own. The red lines on the chart measure Fibonacci retracement levels measured
from the early 2018 peak to bottom formed last December. And it shows the ACWX
testing the 62% retracement line which often acts as a potential resistance
barrier (red circle). The ACWX is also testing previous highs formed during the
second half of last year. There again, that doesn’t mean those resistance lines
won’t be broken. It just means that foreign stocks have to clear those barriers
to resume their uptrend. Another upleg in foreign stocks is probably needed to
push the ACWI in Chart 1 into record territory.
STA Investment Committee Luke Patterson, CEO & Chief Investment Officer Mike Smith, President Andrei Costas, Senior Investment Analyst (Equity Strategies) Nan Lu, Senior Investment Analyst (Fixed Income Strategies)
CBO Report Looks at Effect of Raising the Federal Minimum Wage
Written by: Scott A. Bishop, MBA, CPA/PFS, CFP®
The federal minimum wage (FMW), currently $7.25 per hour, hasn’t increased since 2009—the longest stretch with no federal increases since 1938, when the minimum wage was created. Several presidential candidates as well as proposed House Bill H.R. 582, Raise the Wage Act, would raise the FMW. What effect would a wage increase have on wage earners, families, employers, and the economy?
The Congressional Budget Office (CBO) released a new report that examined the impact of raising the federal minimum wage to $10, $12, or $15 per hour by 2025 and how this would affect employment and family income. According to the CBO, for the roughly 40 million wage-earners, the $15 option would be the most impactful, boosting the wages of 17 million workers who would otherwise earn less than $15 per hour. Another 10 million workers earning slightly more than $15 per hour might see their wages rise as well. But 1.3 million other workers would become jobless, according to the CBO’s median estimate. Also, there is a two-thirds chance that between zero and 3.7 million workers could be affected by a change in employment. However, the number of people with annual income below the poverty threshold in 2025 would fall by 1.3 million.
To summarize the CBO’s findings, the $15 option would:
• Boost workers’ earnings through higher wages, though some of those higher earnings would be offset by higher rates of joblessness • Reduce business income and raise prices as higher labor costs are absorbed by business owners and then passed on to consumers and • Reduce the nation’s output slightly through the reduction in employment and a corresponding decline in the nation’s stock of capital (such as buildings, machines, and technologies).
Based on these possible outcomes and the CBO’s estimate of the median effect on employment, the $15 option would reduce total real (inflation-adjusted) family income in 2025 by $9 billion, or 0.1%. It should be noted that there is considerable uncertainty about the size of any option’s effect on employment, because future wage growth under current law is uncertain, and because the responsiveness of employment to an increase in the minimum wage is unclear.
Nevertheless, the CBO report seems to indicate that a wage increase would have both positive and negative ramifications. More families would have incomes above the federal poverty level. However, the cost of the wage increase could cause a reduction in the labor force. In addition, higher-income earners who buy more goods and services, could see those prices increase.
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