by Franklin J. Parker, CFA
- It is Fed week, and markets see a mere 1% chance of the Federal Reserve raising interest rates this week. Core inflation posted around 2% last week (though figures accounting for everything are still high). The European central bank hiked rates by a quarter-point last week and hinted that more is to come. Of course, it is the commentary from Fed chairman Powell that will push markets around on Wednesday.
- Lawmakers are struggling to put together a budget plan between now and October 1 that would keep the US government from shutting down. This back-and-forth is considerably less dramatic for investors from the debt ceiling showdown earlier this year. By now, investors have grown used to brinksmanship from politicians and many investors shrug their shoulders on a government shutdown with a “been there done that” attitude. Unless a bill is passed by October 1, nonessential personnel will begin to be furloughed.
- After an initial run higher, stock markets have traded mostly sideways through the summer. This lack of direction is indicative of the mixed economic picture and, most importantly, the mixed outlook for corporate earnings. Retail sales post later this week, which could give investors some confidence as we move into Q4, and the all-important Christmas buying season. Without the Federal Reserve to backstop markets, it will need to be higher earnings to push stock prices higher. Until then, sideways and choppy markets are probably here to stay.
Should you add private investments to your portfolio?
The short answer is “maybe.” The longer answer has to do with your goals and, primarily, your time horizon.
Liquidity is an added risk when investing in private companies (or funds). Once you have put the money into the deal, you cannot get it back without a liquidity event — in essence, the company has to grow and/or find a way to cash you out.
In public markets, when a company is not doing very well, you can simply sell the stock and recoup some of your investment. In private markets, however, that option is not on the table. When a company is not doing well, very often they will ask their existing investors for more cash to tide things over. Of course, if the company goes under, you will have lost your entire investment.
Liquidity risk adds another risk, as well. For goals which require cash on a specified date — say, to fund your lifestyle for the year or to buy a vacation home — private investments create the risk that those funds are not available when you need them because the company has not yet had a liquidity event.
And, of course, there is the classic risk that the deal fails — a more common occurrence in private markets than in public.
In the end, whether private investments make sense in your portfolio is a function of many variables, all of which will be dictated by your goals and objectives. Without a proper understanding of what you need doing, we cannot have a proper understanding of which investments make the most sense to you.
Chart of the Week
One of the most reliable recessionary indicators over the last century has been the 10-year US Treasury yield minus the yield on 3-month T-bills. As you can see in this week’s chart, when this indicator is negative, a recession is not far behind. What we have seen recently is the longest inversion, and its extremity was only surpassed in the early 1980s. While other data continues to be mixed, this is an indicator that I put some weight in and it is flashing a warning sign. The “recession is imminent” signal is not the inversion, however, it is when this indicator moves back into positive territory. Once that happens, it is probably time to batten down the hatches and prepare for the storm.
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