Given the great volatility in today’s market, it is important to find investment solutions that allow one to get in and out quickly. Actively traded stocks and exchange traded funds (ETFs) are the easy answer – as opposed to bonds and property – but it is equally important to look at key themes that one must watch out for.
Caution is needed. Although bulls have argued that stock markets have generally rallied around the world since Trump’s election, much of that optimism was centered on his promise to cut corporate taxes, encourage profit repatriation, and boost infrastructure spending. The challenge is that because reduced taxes and greater spending were meant to be financed by savings in his alternative to Obamacare – now a dead duck in the water – Trump’s market-positive policies are now thrown into doubt.
Moreover, the Federal Reserve, which moves markets around the world, is facing a difficult choice between keeping monetary policy loose to encourage spending and growth, and tightening to stem inflationary pressure. While current consensus is that rates will continue to climb slowly, which in the last round proved to be news taken positively by markets, its very leadership may be subject to political tussling going forward, such that any ambiguity on this point may lead to choppiness around the world.
The second theme, however, is a more positive one: There are signs that some drivers of growth are will be strong. Banks should respond positively to higher interest rates. With the executives Trump has appointed, it seems likely that he will be able to pass his agenda of deregulating the financial industry and dismantling the Dodd-Frank Act, thereby freeing up financial institutions from the heavy weight of reporting and compliance.
The fact of the matter is that this decision will affect not just banks in the US, but major banks in other countries and regions, because they are likely to be domiciled in countries that take reference to US banking laws. All of this should mean a broad positive for banks, and in turn greater bullishness for companies seeking credit lines for expansion. All things being equal, capital-intensive sectors and those on the cusp of expansion will benefit and do well, so long as demand keeps up.
The third and final theme to consider is a more neutral one: Conserve your cash. Returning to the start of this article, where the focus was on ease of getting in and out of a market, nothing is more critical to facilitate this than having a strong cash balance and healthy cash flow. While some may advise getting into gold because of the current uncertainties, it is important to note that volatility today is so fast-moving that even the price of gold is difficult to predict. News can move markets faster these days as market observers and investors are jittery, just as investors can rush into gold to save their skin when really bad news breaks, they can run to other instruments when other news breaks out. If one were to be overexposed in gold, price falls may render weaknesses in one’s portfolio. Obviously, there is a cost to holding cash, but sometimes, the cost to not holding it, whether in the form of a booked loss, or a large opportunity cost, can be painful to bear.
These are difficult times, and as quickly as markets move these days, perhaps even these principles will have to be quickly replaced. No matter. While some people invest to maximize gains, others invest to minimize losses. Ultimately however, what is important is to realize one’s gains when one needs or wants to, and to cut losses quickly when one has to. All this points to the necessity of liquidity. Fasten your seatbelts folks; this is going to be a tough ride.