“If you can keep your head when all about you are losing theirs ... If you can wait and not be tired by waiting ... If you can think — and not make thoughts your aim ... If you can trust yourself when all men doubt you ... Yours is the Earth and everything that’s in it.” – Excerpt from “If” by Rudyard Kipling
Over the past few weeks, many investors have been riding a rollercoaster of emotions. U.S. equity markets have fallen sharply from their February highs raising concerns from those who became accustomed to the relative calm of the past two years.
The incoming administration came into office guns-a-blazing attempting to quickly implement several initiatives, which could significantly impact the outlook for both growth and inflation. Add in a news cycle that is crazier than ever and no wonder people are on edge.
On the one hand, the new administrations tariff policy could add to short term inflationary pressures. On the other, their plans to decrease public sector spending would likely have a deflationary impact.
Treasury Secretary, Scott Bessent recently gave a handful of interviews across various media platforms and rolled out a consistent message. To summarize, the U.S. economy has been too dependent on a high level of government spending. This public sector spending has crowded out private sector investment and led to higher inflation, unsustainable debt servicing costs, and higher interest rates. In order to get things back on track, he is suggesting significant government downsizing would be required. He seems to have President Trumps ear.
At this time, markets appear more focused on the deflationary impact of policy. Looking out over longer time horizons, this makes the most sense to me as well. As a result, many forecasters have lowered their growth outlook, while equity markets have adjusted downward.
For the diversified investor this is all manageable and should be expected. Markets do not go up in a straight line. If they did, many more people would be fabulously rich.
I’ve taken some steps to decrease risk across most client portfolios. This entails moving a proportion out of equities and into intermediate and long term government bonds. With the main risk to the economy being a potential growth scare, the higher price sensitivity inherent in longer duration fixed income instruments should come in handy towards balancing out equity market declines.
Looking further out, I do believe things will settle down and I am optimistic we will see higher equity prices at year end. However, in the meantime I’m playing defense.
Sincerely,
Justin Kobe, CFA
Founder, Portfolio Manager & Adviser
Pacificus Capital Management
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Advisory services through Cambridge Investment Research Advisors, Inc., a Registered Investment Adviser. Securities offered through Registered Representatives of Cambridge Investment Research, Inc., a broker-dealer, member FINRA/SIPC. Cambridge and Pacificus Capital Management are not affiliated. Material discussed is meant for general illustration and/or informational purposes only, and it is not to be construed as investment, tax, or legal advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary. Therefore, the information should be relied upon when coordinated with individual professional advice. These are the opinions of Justin Kobe and not necessarily those of Cambridge Investment Research, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Investing in the bond market is subject to risks, including market, interest rate, issuer credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies is impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and the current low interest rate environment increases this risk. Current reductions in bond counter-party capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Diversification and asset allocation strategies do not assure profit or protect against loss.
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