What I Care About This Week | 2023 Aug 28

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by Franklin J. Parker, CFA

The Summary

  • The AI train continues rolling in markets, albeit at a much slower pace. NVDA — the bellwether of the space — posted stellar earnings, yet after an initial pop the stock began to fall. This is not uncommon as speculators tend to “buy the rumor and sell the news” (as the old saying goes). The broader S&P 500 rally also appears stalled, with prices swinging around in search of a catalyst to move higher or lower. In all, the summer has been a boring place for investors — a fact likely to change through the fall.

  • The Federal Reserve had their annual gathering at Jackson Hole, WY this past weekend. Policymakers offered little new commentary on the path of rates and monetary policy. Markets have priced a 50% chance of one more rate hike in the US this year (and a 5% chance of two more). Looking at Europe, markets have priced a 55% chance of another quarter-point hike in September.

  • The big news this August has been the dramatic economic slowdown in China. After a major developer bankruptcy, missed bond payments from a large wealth manager, and poor economic data (in at least one case Chinese authorities simply stopped publishing the data), investors are wondering how long the global growth train can continue with the world’s second-largest economy slowing so dramatically. Cracks are also beginning to show in the US, especially in commercial real estate markets, with borrowing costs skyrocketing and consumer’s pandemic savings nearly exhausted. All that said, consumers have remained strong, as has unemployment. So long as that is the case, I expect developed economies to continue growing.

The Details

By far the biggest challenge when investing is that we are forced to leave the realm of knowledge.

Knowledge is something we acquire with certainty, and, of course, investing is never certain. When investing, we are forced to combine our knowledge of facts, current events, and the past, with our estimate for probable (and improbable!) futures. These futures are what we use to evaluate risks and rewards, obviously seeking to minimize one and maximize the other. Of course, we can minimize risk by only investing when something is known, but that also means that there is little to no money to be made. When investing, risk is the only things that brings reward.

The key, then, is to build a portfolio of reasonable risks — risks that you can afford to take — and eliminate, as much as possible, those risks that you cannot afford to take. Which risks are reasonable will be informed by your goals, your time horizon, and your financial situation; meaning, of course, that what constitutes reasonable risks for you might well be unreasonable for me.

Personal evaluation of what it is you need doing is the lynchpin of this endeavor. Personalized portfolio execution is then the next requirement.

Because of this knowledge/risk dichotomy, I am extremely cautious of anyone who claims knowledge of what is next. We must always speak in probabilities, a fact that also requires us to stay humble and quickly update our views when we are wrong. You can easily go broke being “right” in this business.

In markets, be wrong and be wrong often, but have a plan for when you are.

Chart of the Week

Much has been made of the amount of borrowing done by the US government, and with good reason. Total dollars borrowed by US Treasury is at an all-time high. What is of most concern, however, is not necessarily the absolute value of dollars borrowed, but rather the cost to maintain that debt. Interest payments as a percentage of GDP have spiked dramatically, from 2.5% to over 3.5%. The speed of that change is historic, but the level has been seen before. The early to mid 1980s saw US borrowing costs move to about 5% of GDP. Of course, that came with considerable economic pain and took a decade to reverse, but the silver lining to all of this is that — for once — we are not in “unprecedented” economic territory.

This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature or other purpose in any jurisdiction, nor is it a commitment from Directional Advisors to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical and for illustration purposes only. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and determine, together with their own financial professionals, if any investment mentioned herein is believed to be appropriate to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.

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