This Week in the Market
With Scott McCaghren and Tony LaPorta
The “boring bull” appears to be alive and well since the last commentary that was sent out. There are some potential major market moving events that could really be impactful should they come to fruition. As mentioned in the audio portion of the commentary, the bill supporting pro-democracy activists in Hong Kong was passed by the House and Senate. It now awaits to be signed into law by the President. This could potentially lead to a more confident stance by Hong Kong in relation to the ongoing protests which have erupted in violence multiple times. The support from the U.S. could easily result in two things: 1. Emboldened protesters due to backing by the United States and 2. Crippling of trade talks between the United States and China. The reason that is important is because the domestic equity markets have priced in the potential for progress on a trade deal (a deal we believe will never get done regardless).
We further believe that the Chinese don’t truly care about tariffs due to their ability to devalue the yuan. The thing that they do care about is Hong Kong, so U.S. support of Hong Kong could easily lead to a permanent disruption or dismantling of “progress” made on trade talks in order to avoid an escalating trade war. One could make the argument that every major sell-off that we have seen since July of 2018 was at least in part due to rhetoric, if not actual tariffs in regards to trade tensions.
The flip side of that coin is to evaluate what the long-term effects have been with everything mentioned above. One could also make the argument that major indices have shed these worries time and time again in order to keep the march higher intact. Investors have enjoyed substantial gains in relation to average annualized returns from a historical perspective. However, investing is just that: all about perspective. Our perspective remains the same, in that, some portfolio protection is absolutely necessary at these levels. A common trap for investors during this type of bull market is to abandon original risk metrics to grab all possible returns they can get. Many people lost half of their life savings the last time that mindset was deployed. It is our job to ensure that this does not happen, i.e. having portfolio protection.
Will this limit some of the potential upside returns, absolutely it will. Will this substantially limit downside participation, absolutely it will. To re-iterate, our perspective remains the same that some portfolio protection is absolutely necessary at these levels. We will be keeping an eye on global events this weekend as things could escalate extremely quickly. It may or may not, but we are going more on the side of may.
As always, we continue to monitor all equity, treasury, commodity and currency conditions in order to efficiently deploy capital as well as protect invested assets.
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