WE Invest

June 29, 2018

The Economy

While we came into 2018 with an overweight in equities, the recent trade war rhetoric has increased risks of spill over into the global economy. Patience is wearing thin with the administration’s tactics on trade, and the concerns of a global slowdown are becoming more real. If these tactics eventually work, we hope sooner rather than later, we expect a relief rally. On June 25th we saw markets react nervously to Harley Davidson’s decision to move production overseas. The markets are yet to price in the effects of a trade war and have instead focused on hope; hope that rhetoric subdues, and trade agreements prevail.

While the initial optimism of tax cuts and reduced regulation propelled the stock market, there are many reasons to be cautious. We think that setting price targets is a bit like throwing darts, but many Wallstreet firms have S&P 500 price targets ranging from 2750 to 3000 by year end, implying a single digit return from recent levels. In the end, we are reminded that the stock market is forward looking, the rally late last year was a reflection of today’s great corporate results on the back of tax cuts.

As a result, global equity markets are flat year-to-date with the US up +/-2% and the rest of the world down about the same. While Nominal and Real GDP are increasing in the US, economic growth appears to be slowing elsewhere. We believe economic indicators in the US are not pointing to a slow-down any time soon.

The risks we are watching closely are:

  • We can call it a trade ballet, a scrimmage, or what it is - a trade war. Whatever the outcome, it is unlikely to be quick and has the chance of going wrong. Having said that, when the dust settles, even if there is no real change, it is likely markets will react favorably and focus on positive fundamentals instead of rhetoric.
  • The Federal Reserve is tightening while the US Federal Deficit is expanding significantly largely due to the tax cuts. While currently being ignored, the combination is a real concern. It is not normal to expand the deficit this far along in an expansion. The deficit usually expands as the Fed reduces rates in response to a recession. To see the deficit expand so late in an expansion while the Fed is increasing rates in cautionary.

Tactical Decisions


We continue to increase domestic (US) holdings, we have reduced our allocation to Europe and remained neutral in Emerging Markets. We prefer an overweight of value to growth stocks and mid-cap to large and small. Overall, we have preferred more defensive managers which will allow us to move more aggressively if and when tensions fall and markets rally.

Fixed Income

The Federal Reserve had kept interest rates at effectively zero since December 2008 and has only started raising rates as of December 2015. These extremely low rates pushed investors to take risks in fixed income by investing in lower quality and longer maturities. Today that’s no longer true, and for the first time in over a decade we can talk about short-term fixed income. On June 13th the Fed raised rates a 7th time (2nd time this year) to a target of 2% and signaled two more increases to come this year. This displays confidence in the economy and was welcomed by markets. See Reuters chart here: https://tmsnrt.rs/2Jd4G4U


Fixed income has continued to detract performance for all investors. Still, fixed income plays a very important role in our portfolios. We continue to focus on higher quality fixed income. We are underweight high-yield/ junk, as we don’t think it makes any sense to own this category because you barely get paid for the risk that you are taking. We prefer shorter durations, asset backed, and inflation linked income via short duration TIPS and swapping cash flow for CPI (Inflation).

Tax Free

Municipal bonds continue to outperform taxable bonds in general. Short-duration municipals bonds have also had more attractive valuations compared on a Tax-Equivalent basis (37% tax bracket). Like their corporate counterparts, High Yield Municipal Bonds also look unattractive as yields are at historical lows compared to high quality municipal bonds.

For those of you looking for a quicker, easy to follow update on the models we will be sending out a quick guide to our Asset Allocation Changes next week.

We always appreciate your feedback so please let us know your thoughts.

Ultimately our focus is to grow long-term and focus on the downside. We don’t mind missing some of the upside if it means we’re more cautious with your capital.

Any opinions are those of WealthEngage and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Investments in municipal securities may not be appropriate for all investors, particularly those who do not stand to benefit from the tax status of the investment. Municipal bond interest is not subject to federal income tax but may be subject to AMT, state or local taxes.

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