{"id":485,"date":"2019-08-26T14:05:52","date_gmt":"2019-08-26T14:05:52","guid":{"rendered":"https:\/\/winthropcm.com\/insights\/?p=485"},"modified":"2020-09-25T21:12:49","modified_gmt":"2020-09-25T21:12:49","slug":"weekly-insights-august-26th","status":"publish","type":"post","link":"https:\/\/winthropcm.com\/insights\/weekly-insights-august-26th\/","title":{"rendered":"Weekly Insights August 26th"},"content":{"rendered":"\n

Midway through the Third Quarter \u2013 Gut Check<\/strong><\/h3>\n\n\n\n

We are midway through the third quarter, and it is time to assess our portfolio structure and strategy.<\/p>\n\n\n\n

  1. Domestic equity has posted strong year-to-date performance with the S&P 500 up 13.4%. Market volatility has increased over the past month as global growth slows and the Trump Administration is fighting China with increased trade tariffs. At this point, we do not see an easy solution that allows China to continue to trade with the United States and, at the same time, continue its practice of intellectual property theft. Trump\u2019s tweets last Friday in which he ordered U.S. corporations to relocate their operations out of China provide some insight into the current state of negotiations. We are expecting another volatile week this week.<\/li><\/ol>\n\n\n\n
    1. Interest rates have fallen to historic low levels with the yield on the 10 year U.S. Treasury hitting a 1.47% yield. Credit spreads are holding in. Liquidity in the bond market over the past week has been mediocre. \u00a0\u00a0\u00a0<\/li><\/ol>\n\n\n\n
      1. The United States Congress has used an unprecedented level of debt to plug the budget deficit for the past ten years. And, it will continue. The cumulative budget deficit over the past 10 years is over $8.7 trillion. This was funded through an increase in U.S. Treasury securities. Over the past 10 years, the Federal debt has increased by $8.3 trillion, which is a 70% increase. The amount of the increase in debt is equal to the TOTAL amount of U.S. Treasury debt outstanding in 2006.<\/li><\/ol>\n\n\n\n
        \"\"<\/figure><\/div>\n\n\n\n
        1. The amount of debt is growing at a significantly faster rate of growth than the U.S. economy.<\/li><\/ol>\n\n\n\n
          1. The real problem is that every developed country including Japan, Germany, France and the United Kingdom, are using the same monetary policy toolkit of low rates, quantitative easing and deficit spending in an effort to growth their economies. While it has been hugely expensive, it has not been wildly successful.<\/li><\/ol>\n\n\n\n
            1. Over $15 trillion of sovereign debt outstanding trades at negative interest rates. We are concerned that the global banking system does not operate effectively under negative interest rates. Japanese banks are of particular concern; however, European banks have deteriorated over the past two years. In addition, the life insurance industry is challenged to fund its liabilities with publicly traded assets at low and negative interest rates. The next financial crisis will not be a credit crunch, it will be a solvency issue related to funding.  And, the countries that will need to step in to support the banks will be in debt up to their eyeballs due to the cumulative deficits they have monetized. <\/li><\/ol>\n\n\n\n
              1. At the same time, underlying fundamentals for corporations are deteriorating in our opinion. We expect to see an increase in lay-offs in the fourth quarter which will put pressure on the labor market. We consider this part of a normal business cycle and not a calamity. \u00a0The binge on stock repurchase programs appears to have subsided in 2019 from prior years.<\/li><\/ol>\n\n\n\n
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                1. Shifts in our asset allocation and Portfolio Models include:
                  1. Adding to our broad market equity exposure on weakness<\/li>
                  2. Shifting large cap basis to low volatility strategies<\/li>
                  3. Reducing Financials and adding to the Defense\/Aerospace and the Communications Sectors in our Sector Models<\/li>
                  4. Remaining underweight International and Emerging Markets exposure.<\/li>
                  5. Remaining short duration and overweight credit in fixed income<\/li>
                  6. Holding more cash in our model portfolios<\/li>
                  7. Reduce leverage-based products and securities in portfolios such as closed-end funds.<\/li><\/ol><\/li><\/ol>\n\n\n\n

                    Equities<\/strong><\/h3>\n\n\n\n

                    Stocks were on track to finish higher for the week until China unveiled a new round of retaliatory tariffs and President Trump vowed to respond, unnerving markets. In this new episode of escalation in trade tensions, China announced that it will impose tariffs ranging from 5% to 10% on $75 billion U.S. goods in two batches, effective on Sept. 1 and Dec. 15, including a 25% tariff on U.S. cars. While the Fed and trade dominate the headlines, it is important to note that economic and corporate data remain fairly positive. Earnings from several high-profile retailers last week were solid, indicating that the consumer – the main driver of the U.S. economic engine – remains in good shape.<\/p>\n\n\n\n

                    Markets regained a bit of composure for most of last week. That limb wasn’t too tough to reach given the comparison is a frantic August in which the Dow rose or fell by more than 300 points in seven of the preceding 10 days. After rising for most of the week, a tariff-induced pullback late on Friday led U.S. stocks lower by 1.4%, extending August’s streak of weekly declines. <\/p>\n\n\n\n