By David Guttery
Legislative actions and Administrative policies can have a direct impact upon the economy. As you might imagine, we’ve already begun to observe such in the short time since the election. Consider the previous economic environment that was characterized by uncertainties related to tighter lending regulations, EPA regulations, and the Affordable Care Act. Corporations were reluctant to spend at normal levels in favor of retaining reserves. This reluctance to spend resulted in tepid economic growth, marginal employment gains, and a slower velocity of money. Such created a challenging investment environment.
When corporations hoard cash, then the velocity of money is slow. Inflation is rarely a concern in a slow velocity environment, because generally the economy is sluggish and tepid due to the lack of spending. We normally find a strong dollar in such environments, and such is a disadvantage to international trade for a US domestic company selling products overseas.
Economic conditions like these generally favor the large, to mega cap value, slow growth, dividend paying equities, bonds, real estate investment trusts, and other rate sensitive classes of assets. Growth assets typically do not fare well in such environments.
An election cycle can completely change economic expectations and also the disposition of the market. In just the short time since the election, lending restrictions have relaxed, and the ten year treasury yield has risen on expectations of inflation and higher spending. Also, expectations remain for the repeal or relaxation of previous Administrative policies that had compelled corporations to hoard cash. The velocity of money has increased and continues to rise, and we’ve heard of better than expected employment results from the Labor Department. Consumer and corporate confidence metrics have touched post recession highs. As these and other developments unfold, then the environment for growth assets becomes more lucrative than for value assets.
Economic conditions like these generally favor growth equities of all capitalization sizes, and also specific rate sensitive sectors such as banking, energy, and real estate. We might also observe narrow channels of larger market segments where corporate spending has been significantly below normal for an extended period of time that might be an attractive investment opportunity as economic assumptions change. Process automation technology would fit into that category today. Real estate investment trusts that are highly levered are generally not attractive in a growth economy with higher inflation, and neither will such conditions be favorable to high duration bonds, bond funds, or slow growth, mega cap dividend paying equities
Ultimately, successful long term, objective driven investing is much more a function of time, asset class selection, discipline and patience than it is about market timing.
Said another way, for most its best to strategically manage a portfolio rather than to tactically manage a portfolio. That doesn’t mean that investors shouldn’t proactively respond to seminal shifts and points of inflection. For example, investors who have maintained exposure to large cap risk assets since the election, but now hold a different proportion of those assets on the growth side of the style box rather than in value today, have been rewarded now that we have a completely different economic outlook. The idea is to strategically shift to assets that will likely perform well in the new environment in other words, rather than employing a tactical shift of abandoning growth assets all together in favor of other asset classes.
Successful investors understand the “financial physics” of cause and effect, and navigate changes in the economic environment accordingly.
David Guttery has been in practice for 26 years, with a distinctive focus on the management of retirement assets for the production of durable income. David R. Guttery, RFC, RFS, CAM, is an Investment Advisory Representative of Ameritas Investment Corp, and President of Keystone Financial Group, in Trussville, Alabama. David independently offers securities and investment advisory services through Ameritas Investment Corp. (AIC) member FINRA/SIPC. AIC and Keystone Financial Group are not affiliated. Additional products and services may be available through David R. Guttery or Keystone Financial Group that are not offered through AIC.