By Bob Barber
I hope this commentary finds all of you doing well. A few of you have contacted me lately asking how it’s going with our managed portfolios. To answer that question in a nutshell, we have been actively underweighting and overweighting the different sectors and asset classes that have been either oversold or overbought in the past 12-18 months much more than normal and have had very good returns.
Today, with the way all the sectors and different asset classes have rallied over the past 12-18 months, we have been able to take advantage of them and have some nice gains. However, the markets have not had any major long term pullbacks since 2008 (March 2020 was very temporary), and we are finding it harder and harder to find good values in many of the sectors, as well as the different asset classes. At this time we are managing all our portfolios with a “cautious approach” since there are so many similarities today to early 2000 and late 2007 (I’ve been doing this since 1984) before the markets had a substantial selloff.
I get the question a lot today: Would I invest in the markets right now if I had never invested in them before? Yes, I would but I would be very cautious and systematic in my approach across a diversified portfolio, being very careful of buying into sectors that have been overbought and are overvalued. This is exactly how we are presently managing all of our portfolios at this time. Time, not timing the markets, has proven over and over in history as the best approach to managing a portfolio successfully1.
The Five main economic concerns I see today are:
- Good news could be bad news As the economy opens post-COVID, with too much good news the Federal Reserve may stop giving out “Free candy” in the form of artificially low interest rates that cannot be sustained forever. The market is also on a “sugar high” from the Federal Reserve due to creating so much liquidity in it.
- Massive government borrowing creates high inflation. Once again the Federal Reserve may need to tighten interest rates to curb inflation.
- Different COVID variations are spreading around the world. There is the risk that a variation may come out any day for which the vaccines offer little protection.
- The present Real Estate bubble Mortgage Interest rates need to go up by at least 2-3% over the next few years to get back to normal historic rates. When this happens, home prices may need to decline by as much as 20-25% to compensate for the many home buyers that are already maxed out for a mortgage payment at today’s low rates. If real estate had a major decline which we are way past due for, it could hurt other asset classes that are dependent on the housing markets.
- Higher Taxes In order to pay for all the government borrowing done over the last 1.5 years, the congress and senate may push income and capital gain taxes to higher rates sooner than later.
This article just appeared today on CNBC in regards to higher taxes… https://www.cnbc.com/2021/08/11/democrats-3point5-trillion-budget-plan-would-raise-taxes-for-the-rich.html At some point we need to pay back some of the government debt which takes money out of the economy and the markets. You can’t continue to just borrow, borrow, borrow without some consequences.
As always, our goal is to consistently capture as much of the upside of the markets as possible and avoid as much of the downside as possible while using our “7 Investment Management Principals’ (click here to see the principals on our website) for managing all our portfolios.
That’s all for now. As always feel free to reply to this email or call me at the office at 830-609-6986.
Senior Wealth Advisor
Christian Investment Advisors
1 Proven based on the historical performance of a diversified index such as the S&P 500. Source article: https://www.ifa.com/articles/market-timing_more_evidence_really_doesnt_work/