Climbing The Wall of Worry: How to Keep From Falling

When President Trump last Sunday actually said on CBS-TV’s Face The Nation that the U.S. might go to war with nuclear-armed North Korea (“We’ll see,” said the Commander-in-Chief), the markets took the apocalyptic comment in stride.

Welcome to the normalization of the unthinkable.

As stocks continue to march higher despite today’s geopolitical and economic dangers, they’re proving an old Wall Street adage: bull markets climb walls of worry. The tech-heavy Nasdaq has been particularly impressive, closing at a record high this week.

But to keep from falling off that wall, you must take precautions. Below, our in-house investment gurus offer sober assessments of the latest risks, as well as proactive advice to protect your portfolio (and still make money).

Solid to the core…

Jim Pearce, chief investment strategist of our flagship publication Personal Finance, casts a wary eye at the so-called Trump Bump and also throws some shade on the sunny assumptions of today’s bulls:

“Except for 2017’s first two trading days, all of the gains in the Standard & Poor’s 500-stock index this year occurred in the first six weeks of the Trump presidency.

Since then, stocks have slumped while investors wait for proof that President Trump’s pro-growth agenda isn’t just wishful thinking…

A recent Federal Reserve report estimates annual U.S. economic growth at less than 2% over the next 10 years. Given this sobering statistic, stock valuations based on the expectation that economic growth will return to its former glorious heights seem like pie in the sky.”

By almost every valuation yardstick, the stock market is overbought. Other concerns should give you pause as well. Since 1961, recoveries on average have lasted about eight years — roughly the length of the Obama recovery. Many analysts are now calling for a correction, maybe even followed by a bear market.

Jim advises you to identify a group of “core holdings” that can function as your portfolio’s backbone. To qualify, the investment must be compatible with your long-term wealth building strategy as well as your tolerance for risk. One of the worst things you can do, Jim says, is pick stocks at random without a coherent plan.

Profit catalysts and bargain hunting…

Linda McDonough, chief investment strategist of Profit Catalyst Alert, underscores the proactive steps at your disposal:

“The good news is that retail investors, just like hedge funds, can find ways to hedge in the market. Hedge funds originally were created to do just this; hedge positions. This strategy meant lower-than-market returns with much less volatility.”

Linda’s strategy for “growth with safety” is to look for stocks that are positioned to exploit secular trends. She says one of the surest paths to market-beating gains is to find companies that introduce game-changing technologies, products or ways of doing business.

Linda continually searches the business landscape to pinpoint profit catalysts that can propel a company’s earnings. These catalysts can be a corporate merger, partnership, product, or regulatory green light… anything new that promises to transform the status quo.

Ari Charney, chief investment strategist of Utility Forecaster, advises you to keep your powder dry for the inevitable bargains to come:

“In any given year, a sector can suffer one or more corrections, and that’s when we pounce. Not only do such corrections allow us to pick up solid stocks at more reasonable prices, they also give us an opportunity to lock in higher yields that are leveraged to future dividend growth.”

The market’s mixed mood of optimism tempered by fear could break either way in coming weeks. Regardless, the insurgent nature of the Donald Trump administration ensures daily uncertainty for the duration of his regime. Focus on the fundamentals, of which there will be plenty to scrutinize.

Calibrate your allocations…

In the days ahead, crucial data that gauges U.S. economic strength will indicate whether the market has sufficient momentum to continue climbing that wall of worry, or whether it’s likely to succumb to global anxieties.

The next few days are particularly active. The noteworthy reports on the docket ahead include:

ADP Employment Report, Gallup U.S. Job Creation Index, PMI Services Index, ISM Non-Manufacturing Index (Wednesday, May 3); Chain Store Sales, Jobless Claims, Bloomberg Consumer Comfort Index, Factory Orders (Thursday, May 4); Employment Situation and Consumer Credit (Friday, May 5).

Investors will be looking for signs that the recovery isn’t sputtering. Last week, the government reported that real U.S. gross domestic product increased at a paltry annual rate of 0.7% in the first quarter of 2017. In the meantime, heed the current PF allocations recently set by Jim Pearce, who also serves as director of portfolio strategy for Investing Daily. As pictured here in the pie chart, they are 10% bonds, 25% cash, 30% hedges, and 35% stocks.

Consider taking profits from your biggest growth stock gainers; maintain exposure to precious metals (gold and/or silver) as part of your hedges; and use “stop loss” orders. Some of these steps may seem basic, but the fact is, even veteran investors tend to forget them. Don’t fall off the mountain.

Got any questions or comments? Drop me a line: — John Persinos

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