Market Commentary The Pelican Bay Group

Transcription

1 Market Commentary The Pelican Bay Group October 19,2018 For some time, we have held that it would most probably be the bond market that would put a cap on the equity bull market. Unfortunately, this appears to increasingly be the case. Here is the 10-year US Treasury yield chart, the global benchmark for the fixed income market: The Pelican Bay Group at Morgan Stanley 1250 Pittsford Victor Rd. Building 200, Suite Fifth Avenue, 11 th Floor New York, NY Market Street Suite North Military Trail Suite N Main. Sheridan, WY Visit our website: Contact us please call: (800) Portfolio Management Team The Pelican Bay Group assists high net worth individuals and institutional clients in meeting their financial objectives by offering customized portfolio management strategies. The Pelican Bay Group, a team of Morgan Stanley s, has four experienced portfolio managers covering an array of disciplines and offering a variety of strategies designed to optimize risk to help meet their clients investment objectives. These investment styles are offered as fully discretionary strategies with a comprehensive fee based on the asset value being managed. The team currently manages over $2 billion in client assets. The yield has risen from 2.8% in August to 3.19% today. As a result, the price of the bond has dropped 3% over that timeframe. Thus, investors will find an unrealized loss on the bonds, and we believe that bond losses are not something many investors are prepared to consider. But higher yields put pressure on equity valuations, and the higher yields go, all other things being equal, the more they compete, and compete successfully for investors attention. To use a simple example: If you could get a 7%, 5-year CD today, would you be tempted to sell some equities and lock in that rate? So the bond market offers a kind of pressure on equities. And conversely, when yields fall, investors are inclined to sell bonds and purchase equities. That tailwind has turned into a headwind. If rates move higher, the wind freshens, and vice versa. A second theme we ve long held is succinctly stated by the Global Debt Clock site at the Economist. They ask if the issuance of government debt, around the world, matters: Does it matter? After all, world governments owe the money to their own citizens, not to the Martians. But the rising total is important for two reasons. First, when debt rises faster than economic output (as it has been doing in recent years), higher government debt implies more state interference in the economy and higher taxes in the future. Second, debt must be rolled over at regular intervals. This creates a recurring popularity test for individual governments, rather as reality TV show contestants face a public phone vote every week. Fail that vote, as various euro-zone governments have done, and the country (and its neighbors) can be plunged into crisis. To make a picture, here is the global debt clock of global government debt in 2009 when the financial crisis bottomed, and today:

2 This debt is not evenly disbursed. Countries in red have highest debt levels the United States, China, Western Europe. But the key to keeping debt under control is the ability to pay the interest and principal when due. And if you need to sell more bonds to pay your interest (Which is increasingly the case), or pay back your principal, then you need the confidence of bond investors which allows them to buy your paper. Lacking confidence, they demand a higher interest rate, and may even refuse to buy, if they feel your credit quality is suspect. Thus, you are plunged into crisis (Argentina, Turkey, etc). And so, the maxing out of credit cards, one by one, becomes a feature. It s only a question of who goes into the chute at any particular time. You know that more than once, we ve singled out Italy and China as two leading suspects. In Italy, this appears to be the case. Here is the index of Italian banking shares, which is all you need to know about confidence in the Italian financial system, given that Italian banks are heavy in Italian debt: The sell-off began over the summer, as the new government came to power on a deficit-busting agenda. And this has infected Italian equities as well, here the DJIA of Italy:

3 And in China, the S&P 500 equivalent: So with two major economies experiencing bear markets in equities (down more than 20%), one can no longer speak in terms of theoretical possibilities. And now, we offer a new theme: It is possible/likely that given the recent blow-out of the Federal deficit, that The Debt is going to be a front and center issue in the 2020 elections. That it will no longer be something we can ignore. What to do about all of this is actually quite simple, and is merely a repeat of what we ve discussed before. Have highest quality in bonds and stocks. Avoid buying long-dated bonds. Have some cash. Slowly (not quickly) accumulate a 5-10% position in gold as a hedge against paper currencies. There is no need to hide in a cave over all of this. Rather, adjust portfolios to move out of the way of credit stress. Thus, highest quality equities feature strong balance sheets and good cash flows, so credit distress doesn t hit them directly. To be sure, should credit concerns increase, it has the effect of creating a risk-off mentality, and people sell. And that drives prices lower. But the good news for those with opportunity, it does drive prices lower. For example, we are not buyers in China. But at some point, prices will be too good to pass up, valuations too low to let slip by. And that s when exposure can be taken, and a 3-5 year recovery ride can be enjoyed. For now, tend to your risk, examine what you own. Should problems subside (and they very well might) you will be exposed to increased returns. And should they persist, highest quality means you are in a relatively better place. Tony

4 Who Is The Pelican Bay Group? Our team of financial professionals is national in scope with s stationed in strategic locations across the country. As part of Morgan Stanley, one of the world s most respected financial services firms, we offer access to extensive resources that can prove instrumental in helping you meet even your most complex financial challenges. Our team members include: Anthony M. Gallea Managing Director-Wealth Management Jennifer D. Hartmann, CIMA Managing Director-Wealth Management Senior Institutional Consultant New York, NY Stephen Stribling, CPM Executive Director-Wealth Management International Client Advisor Marcia Bonnet Financial Planning Specialist Mark S. Ryan, CFP First Portfolio Management Director Cynthia Walker-Laroche Richard J. DiMarzo, CPM Senior Paul M. Hanrahan, CRPS Senior Professional Alliance Group Director Shelley Ford Jeff Praino, CFP Certified Divorce Financial Analyst Financial Planning Specialist William VandenBrul Wealth Advisor Jeanine Delgadillo Douglas Hockett Senior Portfolio Manager Sheridan, WY S&P 500 Index is an unmanaged, market value-weighted index of 500 stocks generally representative of the broad stock market. An investment cannot be made directly in a market index. Dow Jones Industrial Average is a price-weighted index of the 30 blue-chip stocks and serves as a measure of the U.S. market, covering such diverse industries as financial services, technology, retail, entertainment and consumer goods. An investment cannot be made directly in a market index. The investments listed may not be suitable for all investors. Morgan Stanley Smith Barney LLC recommends that investors independently evaluate particular investments, and encourages investors to seek the advice of a financial advisor. The appropriateness of a particular investment will depend upon an investor's individual circumstances and objectives.

5 Information contained herein has been obtained from sources considered to be reliable, but we do not guarantee their accuracy or completeness. Bonds are subject to interest rate risk. When interest rates rise, bond prices fall; generally the longer a bond's maturity, the more sensitive it is to this risk. Bonds may also be subject to call risk, which is the risk that the issuer will redeem the debt at its option, fully or partially, before the scheduled maturity date. The market value of debt instruments may fluctuate, and proceeds from sales prior to maturity may be more or less than the amount originally invested or the maturity value due to changes in market conditions or changes in the credit quality of the issuer. Bonds are subject to the credit risk of the issuer. This is the risk that the issuer might be unable to make interest and/or principal payments on a timely basis. Bonds are also subject to reinvestment risk, which is the risk that principal and/or interest payments from a given investment may be reinvested at a lower interest rate. Investing in commodities entails significant risks. Commodity prices may be affected by a variety of factors at any time, including but not limited to, (i) changes in supply and demand relationships, (ii) governmental programs and policies, (iii) national and international political and economic events, war and terrorist events, (iv) changes in interest and exchange rates, (v) trading activities in commodities and related contracts, (vi) pestilence, technological change and weather, and (vii) the price volatility of a commodity. In addition, the commodities markets are subject to temporary distortions or other disruptions due to various factors, including lack of liquidity, participation of speculators and government intervention. The use of the CDFA designation does not permit the rendering of legal advice by Morgan Stanley or its s which may only be done by a licensed attorney. The CDFA designation is not intended to imply that either Morgan Stanley or its s are acting as experts in this field Please note that by clicking on this URL or hyperlink you will leave a Morgan Stanley Smith Barney LLC website and enter another website created, operated and maintained by a different entity. Morgan Stanley Smith Barney LLC is not implying an affiliation, sponsorship, endorsement with/of the third party or that any monitoring is being done by Morgan Stanley of any information contained within the linked site; nor do we guarantee its accuracy or completeness. Morgan Stanley is not responsible for the information contained on the third party web site or the use of or inability to use such site. The views expressed herein are those of the author and do not necessarily reflect the views of Morgan Stanley Wealth Management or its affiliates. All opinions are subject to change without notice. Neither the information provided nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Past performance is no guarantee of future results. Morgan Stanley Smith Barney LLC. Member SIPC. CRC Date of first use: 10/19/2018