Combating a Potential Trump Slump

Over the month it became increasingly apparent that the Trump administration may run into several challenges that could hamper its agenda. Markets reacted particularly strong mid month when anonymous sources claimed that the President asked that FBI Chief James Comey end the FBI’s inquiry into Trump’s former national security adviser, Michael Flynn, and his interactions with Russia.  US stocks sank 1.8% when the news broke and foreign stocks sank 1.2%.  Investors grew concerned that a Russia cloud would hang over the administration and greatly slow or bring to a halt the President’s agenda.  If the tax breaks, reduced regulation and increased infrastructure spending that the market has factored into stock prices are delayed, or never materialize, it would likely send US stocks down.

It is anyone’s guess how the various investigations and inquiries play out, but there will likely be significant volatility over the coming months as new stories break. How much the President is slowed and what actually gets passed will have a significant impact on markets.

How does an investor handle the potential volatility driven by these political issues? The best course of action is to be diversified beyond US stocks.  Having stock exposure outside of the US could help limit any administration related market shocks.  For the year to date, foreign stocks have outpaced those in the US, but foreign stocks remain much less expensive with a price to earnings ratio that is 20% lower than their US counterparts.  In addition, maintaining a diversified high quality fixed income exposure provides a likely hedge to any drops in equity.  In times of severe market stress it’s been shown time and again that high quality fixed income, like US Treasuries, holds up very well.  In 2008, when the US stock market was collapsing, US treasuries rose over 11% for the year.  If there are any significant down swings in US stocks we do not recommend moving out of the asset class.  Instead we recommend waiting until your US stock allocation hits its predetermined minimum threshold and buying in to bring it back to its target allocation.  Other areas of the portfolio, like fixed income and potentially foreign stocks, could be up.  Thus investments that are up can be sold and reinvested in what is down.

By remaining disciplined to your target asset allocation, maintaining a very high-quality fixed-income allocation, and by diversifying broadly you can reduce the potential negative impact of any political drags on the market and remain focused on achieving your long term investment goals.

 

Index Performance      May YTDTrl 1 Yr
US Stock (Russell 3000)1.02%7.96%17.69%
Foreign Stock (FTSE AW ex US)3.26%13.89%18.80%
Total US Bond Mkt. (BarCap Aggregate)0.77%2.38%1.58%
Short US Gov. Bonds (BarCap Gov 1-5 Yr)0.23%0.95%0.58%
Municipal Bonds (BarCap 1-10yr Muni)1.09%3.32%1.50%
Cash (ML 3Month T-Bill) 0.05%0.22%0.44%

 

About

Raffa Wealth Management is an independent investment advisor providing nonprofit organizations, high net-worth investors, and qualified retirement plans with a full range of investment consulting services.  We were established to fill the need for transparency, clarity, and vision in the professional management of investment assets.   Visit us at www.raffawealth.com

 

There is no guarantee that any investment strategy, including those described here, will be successful. Any investment or investment strategy can lose money. Past performance does not guarantee or predict future results.  You should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Raffa Wealth Management, LLC.  This information was gathered from reliable sources but we cannot guarantee accuracy.  Indexes do not reflect the fees associated with actual investments and such fees would reduce the performance illustrated.

There is no guarantee that any investment strategy, including those described here, will be successful. Any investment or investment strategy can lose money. Past performance does not guarantee or predict future results. You should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Raffa Wealth Management, LLC. This information was gathered from reliable sources but we cannot guarantee accuracy. Indexes do not reflect the fees associated with actual investments and such fees would reduce the performance illustrated.
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