Broad Market Perspective
In this episode of the Market Call Louis Llanes, founder of Weathnet Investments, informally discusses the current market environment from a broad perspective. He starts out discussing the latest concerns with the stock markets and quick movements that have created anxiety. He discusses 4 main markets: the U.S. and internationals stocks, US bonds, and gold. He discusses how looking at the market itself rather than listening to the news can be beneficial especially if you focus on a long perspective and in the context of the business cycle.
He discusses separating the noise from the signal from shorter term and longer-term time frames. He also discusses proprietary volatility measures of average percent range bands (APRB) and how they can help see the current state of volatility.
Why Investors Feel Like They Aren’t Making Progress
Louis discusses the 2018 – 2019 markets and explains why many investors may feel like they have not made progress with their investments. He shows why recent 2019 performance masks the fact the we are coming from a much lower level from the end of year sell off in 2018. He graphs the fact that we’ve seen relatively lower volatility compared to the long run but it is in fact rising from recent low levels.
Non-US Stocks and Global Investors
Louis shows how global diversification has resulted in lower returns because non-US stocks have been performing much worse than the US markets. He points out that the Wealthnet Tactical Sleeve managed in client portfolios have increased investment in gold and long term bonds. Louis expects a calming down in volatility in the next few weeks but cautions that short term moves are not important for us because we are long term investors. Wealthnet’s strategy is to seek to benefit from short term volatility if possible.
Two Types of Yield Curve Inversions
Most major markets are at the higher end of the volatility scale as measured by our average percent range bands. Louis believes the market may be due from a pause if not a correction for many reasons. He discusses two different types of yield curve inversions. One is related to the Fed tightening, and another is related to when long term interest rates decline in the market, but the Fed is not really tightening or even lower rates, which signals potential deflation which can be quite bearish. He points out that the market can decline when interest rates are falling. We have seen this in recent cycles.
Keeping Dry Powder
Another sign of concern is the lack of top-line revenue growth and high profit margins that can get smaller in the future. He discusses the need to always look for opportunities and that now may be a good time to have more dry powder to invest in opportunities that can come up.
Focus on Planning Alpha
Louis discusses how reaching objectives should be the priority in driving the portfolio strategy that an individual should make. He cautions to not get caught up with short term market moves with long term objectives. Be careful to derail long term plans due to news and emotional short-term considerations. He discusses how the tactical part of an investors portfolio should be limited so flexibility is present but with guardrails to keep from derailing long term results. He also talks about planning alpha is often more important than stock or market timing. Managing taxes, behavioral aspects, investment location is very valuable over time. He discusses managing portfolios to limit friction so that longer term results could be achieved. This may mean keeping volatility more constant to your risk profile and to simultaneously seek the best opportunities. It is best to have a sustainable approach to get through the peaks and valleys. In the long run, investors can get further along toward goals with less friction.
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