Election Results
Hello all clients,
I hope this email finds you well, happy Friday!
Prior to emailing a comment, I wanted to process and gather my thoughts before I communicated with clients regarding the U.S. election.
The American public is feeling frustrated and called in a big change. Once again, my favourite saying is perfect for this time: “The only constant in life is change.”
It took me a bit to process and determine what was key and critical of my management on behalf of my clients, in light of the policy changes potentially afoot.
I will be monitoring the bond market, first and foremost. The bond market is the one market that will signal the global view of the upcoming policies and changes. Stock markets are lagging indicators, as earnings reports are typically three months in the rear-view mirror by the time they are released to the public. Bond markets are more aligned with “where policy is going” and may be interpreted as positive or negative in the global investment community.
Prior to the election, I circulated a paper written by our Washington strategist focusing on the U.S. deficit and what that could mean, no matter which party won. This is key and critical. All countries are carrying huge deficits, and it is the “global investor” that can impact these markets’ balances. I would like to refresh everyone’s memories to two years ago, when Liz Truss, then Prime Minister of the U.K., presented a “mini budget” that was “spend your way to prosperity.”
The bond market had a “tantrum,” sending rates soaring overnight. Basically, the global investment community said, with their selling of gilts (British bonds), that they had no faith in the strategy and was pulling capital out of Britain. This resulted in a hard backtrack and resignations.
This is every country’s vulnerability and potentially could visit the U.S. if there are concerns around certain policy moves felt to be destabilizing. How many potential showdowns to shut the U.S. government have we witnessed? Many, in the last 10-15 years.
The sharp move of rates in the 10-year, 20- and 30-year bonds would be concerning and destabilizing. Each country has to go to the open/public markets to refinance maturing bonds. If the participation in the auction is low, the government has no choice but to raise the rate to attract investment. This can be inflationary and generally disruptive to mortgage rates, business confidence etc. This has the ability to “shock economic expectations.”
The recent stock market rally is effectively front loading and betting on the corporate tax cuts and easing of regulations for specific sectors like banking, energy etc., that are traditional with Republican policy.
Prior to the election, the market was trading at higher earnings multiples and was deemed expensive; not all industries, but certainly a few focused areas like AI have reached valuation multiples that are reminiscent of 2000 tech market.
Under normal valuation, the market is looking toppy in some areas and reasonable value in others, but suffice to say, instability is not the market’s friend, and this is my concern in general. At current appreciation of the market, it’s primed for perfection on earnings.
This is not grounded in fundamentals and presents concern for my world.
Most clients continue to have 40% to 50% exposure to the stock market. This summer, we took steps to “derisk” to limit serious downside protection due to valuations. Second stage of derisking was implementing three-year ladders of bonds, GIC, etc. to majority of clients’ portfolios. This strategy was to buffer market volatility while getting similar yield with income security, if markets were to become volatile.
I am managing more for the “downside risk” than upside. Markets sell off quickly and, being prepared after a significant performance year, to me, is prudent and practical management.
This year has delivered a great performance for all clients. That being said, in my 35 years, I have yet to see two consecutive years of double-digit gains. If that was to transpire, portfolios would participate as the core investments holdings are quality large-cap companies that would be part of the “melt up market.”
In review of the core fundamentals and how the imminent change could/will impact my clients’ portfolios, I believe we are positioned to manage the market volatility and buffered to income needs for the next 2-3 years.
This is my focus and, quite frankly, my job.
Bottomline, we have a balance of investment that will weather whatever comes our way. I always welcome the opportunity to discuss any clients’ concerns or add more depth for those that welcome that conversation. That is a key part of my mandate and client service: to help bring perspective and balance to what is a very noisy, confusing world of information that we all swim in daily.
