Vacationing Investors Beware: The “Dog Days” Could Still Bite You
Trading typically slows during the lazy summer days, but don’t get too relaxed in your hammock. Potential triggers for the long-awaited stock market correction abound. Below, I provide proactive steps that you can take now to protect your portfolio and still ensure growth.
This Fourth of July holiday week, while Americans tried to enjoy hot dogs, apple pie and baseball, the rogue totalitarian state of North Korea fired its first successful intercontinental ballistic missile. North Korean leader Kim Jong-Un purposely intruded upon our Independence Day festivities as a way to taunt the United States. In a gibe worthy of a Marvel comic book villain, Kim called the missile a “gift” to Americans.
The U.S. responded to the absurdly coiffed dictator with a show of force, by launching missiles deep into South Korean waters. As tensions between the U.S. and North Korea escalate, the White House faces few viable options and Wall Street is growing nervous.
In this context, it’s worth heeding the advice of Linda McDonough, chief investment strategist of Profit Catalyst Alert, who has this to say about summer market conditions:
“As with most intra-earnings periods, the market is more susceptible to external influences… I do think we’ll see increased volatility as the market awaits some firm data on GDP, wage growth and second quarter numbers.”
If you’re trying to decompress on vacation, I don’t want to ruin your time off. But for the sake of your financial peace of mind, it’s prudent to prepare against the mounting dangers to your portfolio.
The bull market is the second longest in history and stocks are overvalued. On a price-to-earnings basis, the S&P 500 trades at 21.5, well above its trailing 10-year average of 17.2.
The economic recovery is well into its eighth year; recoveries historically only last about eight years. The Federal Reserve spent 2016 deferring interest rate hikes; it’s now on course to accelerate them. Rising interest rates often serve as a trigger for corrections.
And let’s not forget the ever-present uncertainties posed by President Donald Trump. Whether you’re conservative, liberal or something in-between, there’s no denying that the man in the White House is unpredictable.
As the dog days unfold, here’s your summer reading for “defensive growth” measures.
Turn to the Midas metal…
You’ve doubtless experienced the apocalyptic arguments from the tawdry hucksters who line their pockets by preying on human fear. The global economy is about to drown under a tsunami of debt! Central banks are debasing national currencies! Hyper-inflation is around the corner! Buy gold and ammo! (And call this 800 number.)
We disdain the hard money zealots who vilify the Federal Reserve as if the central bank were a conspiracy foisted on us by the Illuminati. For decades, these paranoiacs have made a comfortable living by warning that the next Great Depression is just around the corner.
By the same token, it’s foolhardy to be Pollyannish. The latest data suggest that inflation really is a looming threat right now. Combined with worsening geopolitical risks as reflected by this week’s North Korean missile crisis, and you’ve got a rational scenario for a breakout in gold prices.
My colleague Jim Pearce, chief investment strategist of Personal Finance, is probably the most level-headed guy I know. Jim is unflappable and not given to hyperbole. That’s a picture of Jim partaking of his favorite cognitive enhancement — a good cigar.
Even “no-drama” Jim Pearce thinks gold is about to take off. As he puts it:
“Although I have never been a ‘gold bug,’ my guess is the yellow metal will temporarily jump in value over the next six months if we get the stock market correction I am anticipating.”
High-quality, lost-cost gold miner Goldcorp (NYSE: GG) is the best-of-breed gold mining stock. If you’re less aggressive, consider the SPDR Gold Shares ETF (GLD), the gold standard for gold funds.
Stock up on the “white metal”…
Gold isn’t the only crisis hedge among precious metals. Consider silver, which tends to be less volatile than the Midas metal because it also boasts several industrial uses.
My favorite silver play is Wheaton Precious Metals (NYSE: WPM), a silver streaming outfit that makes an advance payment to silver miners in return for the right to buy a designated stake of their production. (For details on these precious metals recommendations, see my February 2 issue.)
Pick well-positioned sectors…
Among the sectors poised to benefit under Trump, three stand out: aerospace/defense, construction, and financial services.
Aerospace/defense is enjoying robust budgets under the extremely hawkish Trump, as his administration shovels massive amounts of federal cash into the Pentagon’s already fat coffers.
Solid defense plays are aircraft manufacturing giants Lockheed Martin (NYSE: LMT) and Boeing (NYSE: BA). But take note, it’s not a foregone conclusion that all defense companies will profit. In the Pentagon bonanza to come, there will be winners and losers.
Jim Pearce warns: “You should avoid jumping blindly into any company branded a Trump stock, which defense companies epitomize.”
A safer bet is the benchmark SPDR S&P Aerospace & Defense ETF (XAR), which we recently added to the PF Fund Portfolio in the Sector sleeve.
Another sector likely to thrive is construction. Trump promises a massive effort to rebuild America’s shoddy infrastructure. But once again, don’t make sweeping assumptions.
Trump’s infrastructure plan actually is a system of tax breaks designed to expedite privatization; it’s not the Keynesian “pump priming” that many observers originally thought. Likely benefactors of increased construction spending could very well be under-the-radar firms that are connected to Trump’s real estate empire. But more to the point, as Trump’s political capital wanes amid persistent scandals, even his allies concede that his pro-business agenda faces headwinds on Capitol Hill.
That’s why I like firms that benefit from the current construction boom, regardless of what happens in the fever swamps of Washington, DC. My favorites include construction and building stalwarts Fluor (NYSE: FLR) and Martin Marietta Materials (NYSE: MLM).
Financial services should thrive under Trump as well, as his administration dismantles the regulatory oversight that Wall Street hates. Rising interest rates also make it easier for banks to generate profits. We prefer banks that sport sound balance sheets, diverse revenue streams, and limited exposure to heavily indebted energy companies. I’ll pinpoint the best bank stocks in successive issues of my newsletter.
Set the proper allocations…
Investors reap returns through various activities, such as selecting specific investments to buy, market timing, and establishing asset allocation. The latter is the most crucial.
The first two activities are the hardest and least forgiving. However, asset allocation is the easiest to determine — and it wields the most power. According to an academic study by the Chartered Financial Analyst Institute, up to 91% of portfolio performance is related to asset allocation.
Jim Pearce also serves as director of portfolio strategy for Investing Daily. He suggests the following allocations: 35% stocks, 30% hedges, 25% cash, and 10% bonds.
Got any questions or comments? Feel free to drop me a line (even if you’re on the beach): firstname.lastname@example.org — John Persinos