Portfolio Shift Anticipated for Income and Non-Income Investors
Mentioned in the September 23rd, “I have something important to say to you,” post, the reasons to de-risk portfolios have grown further during the past two weeks.
There are enough economic and technical signals globally to formally begin taking risk off the table.
One challenge clients face when de-risking portfolios is that they are emotionally attached to some of the investments. In many cases, they have owned these investments for a long time.
Let me be clear:
- I am not saying you HAVE to take action to defend a possible recession and BEAR market in stocks. As long as you are comfortable hanging on to your investments throughout the entire down cycle, collecting your dividends, and letting them rise in the next up cycle, you can chose to do nothing.
- I am not recommending going to cash.
If you’re not comfortable with full economic cycle investing, we should talk about ways to restructure your investments relative to your income needs.
Millionaires vs Billionaires
We must make our choice. We may have democracy, or we may have wealth concentrated in the hands of the few, but we cannot have both.
-Louis D. Brandeis (1856 – 1941)
There has been a fair bit of controversy surrounding income and wealth inequality in real life and the Twittervers. One of the people I follow, Ben Hunt, author of the Epsilon Theory, posed a question that I want to put to all of you.
Take the income gap out of the realm of debate and put it into a real life scenario. Imagine a typical Canadian or American town of 100,000 people, where there are a small number of wealthy people, a lot of middle class people, and a smaller number of poor people.
The economy of the town is based on the income structure of all of these people living their lives with the usual needs.
You get to make one choice to improve the town’s economy and thereby, making the town a better place to live.
Do you add one billionaire or 1,000 millionaires to the population of the town?
The same amount of wealth is added to the community, only it is distributed differently.
Which will positively impact the town more?
Statistically, the very wealthy consume vastly smaller percentages of their net worth than the moderately wealthy or middle class. Hence, extreme wealth concentration tends to slow economic growth.
I’m not slagging billionaires here, but pointing out their limited economic benefit in society.
There is going to be lots of debate around this idea once the US presidential campaign kicks off for real. So, when you hear arguments for either side, please recall the analogy above.
Slowing Growth and Inflation
There is no way for me to sugar-coat the fact that global growth is slowing. Global manufacturing has been in recession for at least three months now.
In Japan and China, manufacturing has slowed dramatically and the Eurozone has seen numbers drop into contraction even though they barely recovered back to expansion.
The US and Canada were seen as “islands unto themselves,” in terms of manufacturing until the September data was released. They both slid right to the “breakeven line.”
The BULLISH spin to these realities is that the Services sector is still strong and our economies don’t really rely on manufacturing anymore…we are service economies.
Fair enough, but services usually follow manufacturing into recession, and that is what we are witnessing now.
Below is a chart of the SERVICE Purchasing Managers Index (PMI) in Europe.
‘Yes Nick, but everyone knows Europe is a mess.’
Well, let’s look at the SERVICES PMI for the US announced on Thursday, October 3rd:
- Non-manufacturing index fell to 52.6 from 56.4
- Business activity fell to 55.2 from 61.5
- New orders fell to 53.7 from 60.3
- Employment fell to 50.4 from 53.1
- Supplier deliveries rose to 51 from 50.5
- Inventory change fell to 53 from 55
- Prices paid rose to 60 from 58.2
These numbers are all still above 50, which means they are still in expansion mode, however, these are fairly significant downside adjustments.
Notice the prices paid component of the data release. Costs are still rising for consumers even though the economy is softening.
Bottom line: This is a challenging environment for investors.
Higher inflation in a weakening global economy will put pressure on central bank policy.
Don’t be afraid to adjust your investment holdings if you feel uncertain.