For the first time in a long time, investors are experiencing global economic and geo-political headline risk. Since late last year I have been saying that in the absence of significant “uncertainty,” stock markets might trend upward. Stock markets like quiet and certainty and they LOVED the first half of 2013. Until August, the most significant economic event of the year had been the banking crisis in Cyprus.
Last month, Syria provided investors with their first taste of uncertainty since 2012. It isn’t “sell everything and head for the shelter” uncertainty, mind you, but uncertainty nevertheless. And it’s been so long since we have had to deal with ANY uncertainty, investors weren’t sure what to do about it.
The revelation that Assad’s troops have been killing Syrian citizens with poisonous gas and chemicals has the world realizing that Syria’s discord is probably not going to end without becoming messy. And it’s the uncertainty of just how messy it will get that has investors worried.
Stock markets all over the world were looking for any excuse to take profits and Syrian angst was more than enough. In August the S&P 500 Index declined 2.89%, the Dow Jones Industrial Average dropped a little more than 4% and the EAFE (Europe, Australia & and the Far East) fell just over 1%.
However, all three indexes increased between 15% and 20% for the past 12 months so a slight reversal in August should not be viewed as the beginning of the end.
One consequence of the Syrian conflict that could portend troubled economic times is the price of a barrel of oil. Oil traded for around $77 per barrel at the end of 2012. At the end of June, it was a little over $96 and it closed August at $107 per barrel… an 11% increase in two months and a 39% increase since the end of the year.
As that increase is passed along to us at the gasoline pump, it acts as an additional tax, thereby reducing the amount of money we have to spend on other items.
But even as I write this, headlines about the Syrian conflict are becoming less alarming, less critical and less urgent. And without other alarming and urgent headlines to pick up the slack, stock markets are beginning to trend upward again.
The other thing to which we have been paying attention is the interest rate on the 10-year Treasury Bond. As investors are guessing the Federal Reserve will soon begin to “taper” their purchases of Treasury Bonds and Mortgage-Backed Securities, they are selling bonds first, driving the interest rate higher. At the end of April, the 10-year bond had a yield of 1.67%. It was 2.57% at the end of July and 2.78% at the end of August. Since the end of August, it has been above 3% and is currently just below 2.9%.
In a rising interest rate environment, it is wise to keep bond “duration” as short as possible. While we are maintaining a fairly short duration in our corporate bonds and agency bonds, we have a much longer duration with municipal bonds which, in our opinion, are grossly mispriced.
I received a notice the other day from FINRA, one of the regulatory agencies in our industry. It was a monthly newsletter, more or less, and one of the articles had to do with spotting a Marijuana Stock scam. First of all, if someone is trying to talk you into investing in a company because it grows marijuana, it’s a scam. How’s that for easy? But I recognize that not all investment scams are that easy to identify. So here are several of the things that FINRA recommend you consider when you are being approached with a “special” investment opportunity:
- Ask, “Why me?” Particularly if it is a total stranger calling you on the telephone. If it’s such a great deal, why is this person cutting you in on it? Answer? It’s NOT a great deal. Many times, however, these offers come from friends, which can really cloud your thinking. It’s no coincidence that investment scams gain a lot of traction at churches and synagogues. If people at your place of worship are investing in it, it must be a good deal, right? Wrong. In my thirty-two years in this business, I have been asked to evaluate “special” investments that clients have been offered. They know someone who knows someone who knows someone who has developed this special method of turning Tang into a drink that tastes like orange juice. I am asked about these types of “opportunities” once every year. And in my entire career, I am aware of ONE opportunity that didn’t turn into a 100% loss for the client. ONLY ONE. And that one has been only a “decent” return… not the kind of return you should expect when the odds are you will lose all your money if it doesn’t work out.
- Consider the source. Be skeptical of companies that issue a barrage of press releases and promotions in a short period of time. The objective may be to pump up the stock price so they can sell their shares, leaving you holding the bag. And if the source is your next door neighbor, well, we repeat, consider the source.
- Do your research. The FINRA article listed several methods of doing your research. Let me just say that if you are a Boyer & Corporon Wealth Management client, let us do it for you. That’s what you pay us to do.
- Know where the stock trades (or IF it trades). Most unsolicited spam recommendations involve stocks that do not trade on the NASDAQ Stock Market, the New York Stock Exchange or other registered national securities exchanges. These stocks may be quoted on an “over-the-counter” quotation platform. Many of these securities don’t have a very liquid market and the reporting standards are not as strict as the registered exchanges.
- Be wary of frequent changes to a company’s name or business focus. It could be that a company with a new name is trying to make you forget about the old name… like calling itself Ally Financial so you won’t remember it was formerly called GMAC.
- Check out the person selling the stock or investment. If it’s your neighbor or someone in your church, there’s probably not much to check out, which is all the more reason to avoid the investment. If it is a registered person in the investment industry, you can use FINRA’s BrokerCheck to vet a broker or you can investigate a Registered Investment Advisor (like Boyer & Corporon Wealth Management) at the SEC website.
The U.S. economy continues to limp along in a positive direction.
- Unemployment continues to decline (albeit very slowly and very stubbornly). The unemployment figures are somewhat skewed because people who have stopped looking for work are no longer considered unemployed. Nevertheless, it is at least safe to say that unemployment is not increasing.
- Housing prices continue to climb in virtually every region.
- Sales of existing homes continue to increase; however, sales of homes could begin to slow as mortgage rates increase.
- Consumer spending has increased this year, although that could change soon as the increased price of gasoline affects the amount of money one has to spend.
- Consumer debt has declined this year.
While we slightly pared our equity positions recently, we are not in any hurry to decrease our equity exposure even more. Until some global economic catastrophe grabs the headlines, this stock market will likely continue to creep upward. The Syrian situation is calming and there don’t appear to be any other disasters on the immediate horizon. Although it doesn’t surprise us to see the 10-year Treasury Bond as high as 3%, we don’t expect it to “spike” much higher this year. At Boyer & Corporon Wealth Management, we continue to focus on cash flow and short duration with our investment selection. In addition, we feel that certain areas of the municipal bond market have been severely mispriced and provide an exceptional investment opportunity.
This information is provided for general information purposes only and should not be construed as investment, tax, or legal advice. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.