April's Fool

A tumultuous month plagued with political conflict, escalated threats of a trade war, and talks of increased regulatory scrutiny on big tech firms.   Combined with another cabinet reshuffle and scandal effecting the Trump administration, has given the media more ammunition, making one thing clear: President Trump does not play well with others.  Although the voting public may question; “does the President still have the best people working for him”, as there has been recent skepticism, whether anyone qualified for a cabinet position would want it, given the cabinets record of late.  There is no denying the Trump administration’s actions have led to record volatility, causing the heads of strategy at the largest brokerage firms, relaying messages of reassurance through their financial advisors to their clients.  This month’s issue of The Samra Report focuses on the Trump administrations actions as they affect investment portfolios, the changing dynamic of municipal bonds and the search for high-quality/high-yield income, and the potential long-term benefit of President Trump’s policies. 

The passage of the new tax laws has increased the demand for financial planning and guidance.  Although the majority of Americans plan to pay less federal income taxes, the new tax plan effects residents of select (blue) states more than others.  Republicans in the State’s most affected from the elimination of the State and local tax deductions have come to realize swiftly, they may be wealthy, unfortunately the majority were not wealthy enough to benefit from the new tax code’s estate and tax gift exemption, or lowered corporate tax rate, and in fact will pay more than they have in previous years.  For the Trump administration, this perceived bad news is leading to local democratic victories in republican states, a factor that will play into the next Presidential election, and the sustainability of President Trump’s policies.  As a result, 2018 has investors spooked, as global stock markets could face the most volatile period since 2008-09, leading investors to question their investment strategies.  At Samra Wealth Management, we believe the volatility will continue throughout the remainder of the year, and it is a critical time for clients to maintain the risk level in their portfolios.  A shift towards a conservative allocation during this volatile period, is likely to create a scenario where clients lock-in their losses.  At Samra Wealth Management we are reiterating to our clients, the need to stomach the rollercoaster ride that is 2018.  The recommendations made in our 2018: The Year Ahead are consistent to our current recommendations, as we maintain allocations towards: Technology Healthcare, Industrials, financials and select equity positions within the consumer discretionary area. Our recommendations for fixed income, however, have changed.

As the “global bond markets enter a new phase”, investors need to change their approach to fixed-income investing.  The new Chair of the Federal Reserve, Jerome Powell, confirmed during his first FOMC meeting that the United States is in a rising interest rate environment, further escalating fears in conservative investors.  With global central banks following the lead of the Fed, conservative investors, typically those invested in bonds, should be cautious of their holdings.  Oftentimes, financial advisors utilize a strategy of bond laddering for their clients, a strategy where individual bonds mature at different dates.  This strategy, or lack of strategy, takes little strategic thought, and introduces unnecessary risk into client portfolios.  In layman terms: why would an investor hold bonds at increased risk of loss, during a rising interest rate environment, when they have the freedom to trade-out of assets, into higher-quality/higher-yielding bonds.  At Samra Wealth Management, we emphasize the use of a shock-analysis to each of our clients, an analytic tool designed to provide clients insight into their risk exposure, when interest rates increase.  Furthermore, it is our belief a bond laddering strategy is outdated, the lack of portfolio management within the fixed income segment of a client’s portfolio is often overlooked.  For select investors, typically those investors whose fixed income portfolios accumulate to over $500,000, we recommend an active management fixed-income strategy, where we work with our clients to achieve exposure into tax-free, or tax mindful income.  With changes in the recent tax code, investors in high-income brackets can greatly benefit.

President Trump’s policies may have ruffled a few feathers, as global markets react to the Presidents Twitter attacks.  As usual, the media has caused panic, as much of the rhetoric seems to be focused on short-term volatility and losses in market capitalization.  In the past week, talks of increased regulation in the technology sector, and the Presidents hostility towards Amazon have caused US markets to experience volatility, echoing fears felt during the great recession.  However, the media, in its short-sight, seems to have forgotten what led to the great recession.  There may be more long-term benefits of President Trump’s policies, with regards to his personal vendetta against Amazon.  In a time where corporations are investing heavily into technology, over human-capital.  Portfolio managers and economist should question, how long is this practice sustainable, as it will inevitably lead to lower wages flowing into the economy.  The United States is a consumer driven economy, as funds flowing into the economy slow, the result would be a detrimental effect on consumer confidence and consumer spending.  Reminiscent of what led to the Great Recession:  Americans chose to outsource and off-shore jobs, knowing companies like Dell Computers used this model to sell $400 desktop computers.  During the tail-end of a bull-market, investors paid little attention to fundamentals, and concentrated on market sentiment, and advice they received from non-professionals, while the wealth effect led the American public to believe they were wealthier, allocating more towards riskier assets, while increasing debt levels.  As global debt reaches its highest point in history, investors should be concerned with the United States growth engine slowing, as domestic jobs are automated, outsourced and off-shored.  Although President Trump has targeted Amazon, the President should understand that Amazon will long be standing once the President has left office.  Jeff Bezos, CEO at Amazon has created a near perfect company, that although beats competitors on price, provides their customers with unmatched value, in terms of delivery, reviews, and customer service.  With 55% of Amazon’s revenues coming from outside of North America, this may be a battle the President is unable to win.

 

 

 

 

 

 

All information contained herein is derived from sources deemed to be reliable but cannot be guaranteed.  All economic and performance data is historical and not indicative of future results.  All views/opinions expressed herein are solely those of the author and do not reflect the views/opinions held by Advisory Services Network, LLC. The information and material contained herein is of a general nature and is intended for educational purposes only.  This does not constitute a recommendation or a solicitation or offer of the purchase or sale of securities. Before investing or using any strategy, individuals should consult with their tax, legal, or financial advisor.

 

Stock Index prices are listed as of the close of business March 30, 2018, and do not take into consideration any reinvested dividends.

 

 

 

 

References:

Bloomberg.com. (2018). SPX Quote - S&P 500 Index. [online] Available at: https://www.bloomberg.com/quote/SPX:IND [Accessed 31 Mar. 2018].

Harris, E., Zhang, C. and Blanch, F. (2018). The RIC Report: Stepping Off Easy Street. [online] Merrilllynch.com. Available at: https://olui2.fs.ml.com/MDWSODUtility/PdfLoader.aspx?src=$/net$/Util$/GetPdfFile$?dockey$=6208-11840040-3 [Accessed 30 Mar. 2018].

House View by the Chief Investment Office. (2018). UBS House View Monthly. [online] Available at: https://www.ubs.com/global/en/wealth-management/chief-investment-office/latest-views/house-view-monthly.html [Accessed 30 Mar. 2018].

Msci.com. (2018). ACWI - MSCI. [online] Available at: https://www.msci.com/acwi [Accessed 31 Mar. 2018].