Last week, the markets experienced their first daily loss of more than 1.0% since last October. As of Friday’s close, the S&P 500 was down 1.44% for the week as a result of Washington’s political battles related to repealing Obamacare. However, this was a market pullback that was long overdue given the Trump “pro-growth” rally that started last November.
Late Friday, the Republican leadership pulled their proposed Obamacare replacement legislation because of insufficient votes. This was a significant defeat for the Trump administration as ~25 Republicans would not pledge their votes to pass the bill.
Now legislative action will focus on the “center piece” of President Trump’s agenda which is to pass corporate tax reform designed to accelerate GNP growth into the 3-4% range vs the current 1-2% growth rate. The administration was originally targeting to pass tax reform legislation by August although this appears to be optimistic given the recent setback with healthcare reform. In my opinion, the recent Fed rate hike plus any delay of pro-growth legislation due to continued “political posturing” in Washington, could trigger a significant market sell-off.
Our Current Equity Strategy
Based on the negative climate in Washington regarding Trump’s potential inability to pass his “pro-growth” agenda, we continue to lock-in profits in overbought sectors that are at or near all time highs. Specifically, we currently do not own the three (3) “high flying” indices (Dow, S&P 500 and Nasdaq). We believe the major market indices are ripe for at least a 3-5% correction. For example, the Dow is already down ~2.5% from its closing high of 21,115 on March 1 which could be a sign that such a correction has already started.
In contrast, our current equity positions are focused on oversold sectors, e.g., retail (XRT), energy (XLE), and sectors displaying momentum, e.g., emerging markets (EEM-China, Latin America, etc), Europe (VGK), biotech (XBI) and semi-conductors (SMH).
Given the potential for a market correction in the coming weeks due to an “unhealthy Washington swamp”, we are maintaining 15-25% cash positions in all accounts with cash allocation dependent on each client’s portfolio risk profile.
Finally, we continue to monitor price action in commodities, e.g., gold and copper mining companies for possible purchases in our more aggressive accounts. Although these sectors are volatile and require a well-timed entry point, they do offer the potential for significant profits and hedging against a market correction.
Our Current Fixed Income Strategy
We are pleased to report that our fixed income portfolio held up very well following the Fed’s 0.25% rate hike on March 15. This favorable performance was the result of the changes we made last November in which we added “floating rate” bonds to our fixed income portfolio. Typically, floating rate bond prices hold up well or even increase in value in an increasing rate environment.
We were forced to sell one of our fixed income funds (HNRZX) last week as this fund is converting to an “interval fund” at the end of March. The new interval fund reduces liquidity by allowing redemption only on a quarterly basis. Although this fund has been a stellar performer, we felt that restricting redemptions was not in the best interests of our clients.
As always, we would like to emphasize that our investment philosophy is to actively manage risk 1st and return 2nd in order to safeguard our clients’ hard earned nest eggs. In addition, we believe that locking-in profits from time to time is better than the “up and down” ride of typical “buy and hold” strategies.
Until next time…relax, give thanks, create happy memories and let us navigate your ride down Wall Street!