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STA Weekly Report – Let’s Hope Global Central Banks Know What They’re Doing

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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

Source: Financial Times

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.

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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 doing it? 

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 subdued indefinitely.

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

  1. 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.
  2. Understand your financial situation and align your portfolio with your risk profile so you can sleep comfortably at night when market volatility returns.
  3. Assess your portfolio and make necessary adjustments when markets are calm and stable.
  4. 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.

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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.

Weekly Global Asset Class Performance

If you have any questions, please feel free to email me at luke@stawealth.com.

Luke

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?

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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.



Important Disclosure:
Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by STA Wealth Management, LLC (“STA”), or any non-investment related content, made reference to directly or indirectly in this article / newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this article / newsletter serves as the receipt of, or as a substitute for, personalized investment advice from STA.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  STA is neither a law firm nor a certified public accounting firm and no portion of the article / newsletter content should be construed as legal or accounting advice.  A copy of the STA’s current written disclosure Brochure discussing our advisory services and fees is available upon request. Please Note: If you are a STA client, please remember to contact STA, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. STA shall continue to rely on the accuracy of information that you have provided.

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