As we pass the half-way mark in 2018, the remainder of the year is filled with uncertainty. With a strong start out of the gate, investors are faced with sluggish returns, as corporations report strong earnings and sound fundamentals. With resurfaced talks of a recession, investors have shown they have been quick to take gains off the table in 2018, preventing a continued upwards trend in the S&P 500. At Samra Wealth Management, we believe two factors we have not previously discussed contribute towards this uncertainty: Political Risk, and the Risk of increased data regulation. This month’s issue of The Samra Report covers the likelihood of President Trump winning another term in office, what factors play into this victory, and how to mitigate portfolio risk given the uncertainty.
A study from Ohio State University shows fake news played a statistically significant role in depressing Hillary Clinton’s support on Election Day. From fake news such as the Pope endorsing then candidate Trump, to President Trump convincing his followers that he would bring back coal mining jobs to the United States. Although these statements lack merit, President Trump’s support has grown amongst his own followers. However, this tactic of utilizing false statistics and setting unrealistic expectations is now being used by Democrats, most notably in the recent victory of Alexandria Ocasio-Cortez. Ocasio-Cortez, ran on Medicare for all, a universal job guarantee, paid family and sick leave. Unfortunately, these enticing promises come with no plan, in how to fund such programs. As a share of the nation's Gross Domestic Product, health spending accounted for 17.9 percent. The idea the government would be able to fully fund Medicare for all, is ludicrous, without a plan in place to lower the cost of healthcare. In playing the Trump card, Ocasio-Cortez ran a victorious campaign based on unrealistic expectations, of which we expect to see more of between now and mid-term elections.
Given the current political climate of the United States, it is very likely the President could win a 2nd term in office. However, three factors could prevent this:
1. With President Trump victorious on his tax plan, and reversing many of his predecessor’s decisions, powerful constituents may ask themselves, what additional benefit would President Trump bring in a second term.
2. With 46.9% of eligible voters not voting in 2016, a push for local democratic victories could steer the midterm election. However, this is to become more likely when voters file taxes, and notice an absence of previously deductible (SALT) State and Local Taxes.
3. The Vatican to endorse another candidate. With 8% of President Obama’s supporters, believing the Pope endorsed Donald Trump, what may appear as insignificant, may be enough to turn the polls.
At Samra Wealth Management, we are not in the business of predicting election outcomes and reiterate focusing on a researched based investment philosophy. We restate the opinions of our January newsletter 2018: The Year Ahead. We recommend sustaining increased allocations towards Technology, Healthcare, Financials, industrials and select Consumer Discretionary stocks (Amazon, Alibaba and Walmart). In order to mitigate risk during a period of uncertainty, similar to what the market is currently experiencing, we recommend:
1. Convertible Bonds
2. Leveraged Gold ETF’s*
3. Tactically and tax efficiently move into cash and cash alternatives.
Moving into cash and cash alternatives may appear to be overly conservative, however, we believe the market is testing recessionary levels, and we expect in the next 18 months to see a significant economic pullback. Taking gains off the table and increasing allocation towards convertible bonds is our top recommendation. Convertible bonds, bonds that can be converted to stock at a preset price, allowing investors to collect interest payments, and convert to equity. Another common strategy used by financial advisors to mitigate risk, is to increase allocations towards alternative investments. Given the current global economic climate paired with rising interest rates, we recommend moving into precious metals and out of industrial metals. Although alternatives investments have little correlation to traditional investments, they do not appreciate at the same velocity as equities. For those investors who are able to accept more risk, we recommend double-leveraged positions in gold.
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.
*The use of leverage in ETFs can magnify any price movements, resulting in high volatility and potentially significant loss of principal.
Cms.gov. (2018). Historical - Centers for Medicare & Medicaid Services. [online] Available at: https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/NationalHealthAccountsHistorical.html [Accessed 30 Jun. 2018].
Gunther, R. (2018). Fake News May Have Contributed to Trump’s 2016 Victory. [online] Documentcloud.org. Available at: https://www.documentcloud.org/documents/4429952-Fake-News-May-Have-Contributed-to-Trump-s-2016.html [Accessed 30 Jun. 2018].
Pewtrusts.org. (2018). Why Are Millions of Citizens Not Registered to Vote?. [online] Available at: http://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2017/06/why-are-millions-of-citizens-not-registered-to-vote [Accessed 30 Jun. 2018].
Samra, I. (2018). 2018: The Year Ahead. [online] SAMRA WEALTH MANAGEMENT. Available at: http://www.samrawealthmanagement.com/market-commentary/2018/1/3/2018-the-year-ahead [Accessed 31 Jun. 2018].
Stein, J. (2018). What Ocasio-Cortez wants for America after beating Joe Crowley. [online] Washington Post. Available at: https://www.washingtonpost.com/news/wonk/wp/2018/06/27/ocasio-cortez-beat-joe-crowley-campaigning-on-medicare-for-all-guaranteed-jobs-and-abolishing-ice/?utm_term=.cceec48406ec [Accessed 30 Jun. 2018].