Cedar Brook Groups' Azim Nakhooda is Guest Advisor in Cleveland Crain's
Cedar Brook Group's, Azim Nakhooda, is a guest advisor in Cleveland Crain's where he discussed politics and portfolios in the future.
Investors, capital markets, economists, nations and many others are attempting to determine what their financial implications may be from the Trump administration and stated policy initiatives.
For months — dating back to the pre-election projections — the markets have been tilting in seemingly direct response to Washington's daily dramas rather than fundamentals.
Since Nov. 8th, markets have generally risen under the perception of a "friendlier" business environment, less regulation, and a potentially lower tax umbrella. Financials, in particular, have rallied as these factors would appear to be accommodative to their interests. Looking forward though, we have to wonder, "How sustainable is this rally?"
Consider the following juxtaposition: Barack Obama entered office in January 2009 with the Dow Jones at 7,949 and then almost immediately began policy initiatives that were generally regarded as heavy on financial and consumer regulation, higher taxes and even a philosophically Keynesian approach (which favors bigger government and more oversight).
Trump entered in January 2017 with the Dow Jones at 19,827 and all of the tailwind stimulation as described above.
So, which is the better combination? The Dow at a relative low point and Obama's point of view or the Dow at historic highs and Trump's point of view?
Politics aside, I'll take the cheaper market every time. Over a full cycle, increasing earnings and lower valuations are superior catalysts for growth than political rhetoric.
Even if we allow for the possibility that the Trump administration will successfully legislate all of the platform concepts spoken about thus far, the time, political process, and lagging effect to specific market sectors and earnings is indeterminate. Couple that with known global risk factors such as extreme interest rate conditions, margin compression, diminishing policy tools at central banks, and equity valuations, and the conclusion is cautionary.
More specifically, we really don't know who the winners and losers may be from a rapidly changing political spectrum. Or, if the market has already voted to that effect, then how much of the "win" is already priced in?
Even the less correlated arenas bear some risk from our political climate. For example, emerging market economies represent cheap relative valuations, strong demographic trends and rising dividend yields. Allowing for perennially higher volatility, there is still a potential risk-adjusted return opportunity from that asset class.
However, highly isolationist or protectionist trade policies may directly curb the financial trajectory of the developing markets. Trump's policies infer a stronger dollar outcome as he focuses on U.S. infrastructure and corporate growth through tax cuts. A muscular greenback is another significant concern for the developing world, as they already strain under the prospect of higher U.S. interest rates.
So, as the worries start adding up, investors understandably ask what to do.
Perversely, my client portfolios will seek to benefit from potential volatility. If the margin for error is thin, then any perception of error is likely to be met with extreme corrections. Markets in those circumstances tend to overshoot, which is good if you have cash or liquid assets poised to buy.
Similarly, there could be an ironic boost in earnings for European companies, as they'll enjoy trade premiums versus U.S. competitors with higher export pricing.
Thus, multinationals in Europe with diversified revenues could shed recent valuation hurdles and look attractive again to the long-term equity player. The emerging market theme as described would become even more compelling net of a sell off, as it is by definition a long-term choice.
Domestically, I believe the rising tide advantage to passive strategies may be over. To grind out excess return going forward, we need to be willing to own stocks that have been out of favor, and assume that security selection will be a greater component of total returns.
In the shallower end of the pool, municipals have provided an oasis of calm during recent market upheavals. "Munis" are impacted mostly by fundamental domestic factors and may benefit directly from increasing demand and credit.
We certainly live in interesting times. Navigating the investment climate is made more difficult than usual, when coupled with volatile political arenas and rapid change.
The thoughtful investor and their adviser team will stay steady through the noise, diversify above all else, hold cash patiently at 0% and summon the conviction to buy when others are capitulating.
Lastly, we're only two years away from the mid-term elections, and the early glimpses of the 2020 election cycle to start this crazy dance all over again.
Azim Nakhooda is a principal and partner at Cedar Brook Group. His practice focuses on comprehensive wealth management strategies for high-net-worth families.
"The opinions and forecasts expressed are those of the author, and may not actually come to pass. This information is subject to change at any time, based on market and other conditions and should not be construed as a recommendation of any specific security or investment plan. Past performance does not guarantee future results."; "Municipal bonds may subject investors to the Alternative Minimum Tax (AMT). Municipal bonds are usually exempt from state and local taxes, though discount bonds may be subject to capital gains tax."; "Diversification seeks to reduce the volatility of a portfolio by investing in a variety of asset classes. Neither asset allocation nor diversification guarantee against market loss or greater or more consistent returns."
(Securities offered through Securities America, Inc. Member FINRA (www.finra.org) / SIPC (www.SIPC.org). Azim Nakhooda, Registered Representative. Advisory Services offered through Securities America Advisors, Inc. An SEC Registered Investment Advisor. Azim Nakhooda, Investment Advisor Representative. Cedar Brook Group, LLC and the Securities America companies are not affiliated.)
About Cedar Brook Group
Headquartered in Cleveland, OH, with offices in West Bloomfield, MI, and Palm Beach Gardens, FL, Cedar Brook is one of the largest independent wealth management firms in the region. Cedar Brook’s seventy-plus professionals deliver customized, personal services including comprehensive wealth strategies, investment and insurance advice, retirement plan consulting, and group benefit programs to physicians, corporate executives, privately held business owners, and families. Cedar Brook has been recognized again as a Top Workplace in Northeast Ohio by Workplace Dynamics according to the Plain Dealer's study. The firm offers securities through Securities America Inc., member FINRA/SIPC. Advisory services are offered through Securities America Advisors Inc., an SEC Registered Investment Advisor. Cedar Brook Financial Partners LLC dba Cedar Brook Group and the Securities America companies are not affiliated.
Click Here to Read the Article on crainscleveland.com