Top Five for August 2017

Transcription

1 Top Five for August 2017 By: James Hickey, CFA Chief Investment Strategist The information and opinions in this report were prepared by James Hickey, Chief Investment Strategist for HD Vest Advisory Services (HDVAS). Information and opinions have been obtained or derived from sources considered reliable, but their accuracy or completeness cannot be guaranteed. This represents James Hickey s opinion as of the date of this report and is for general information purposes only. HD Vest Financial Services and its affiliates do not undertake to advise you of any change in opinion or the information contained in this report. Reports and opinions prepared by other sources may be inconsistent with, and may reach different conclusions from, this report. The information is provided for educational purposes only. HD Vest Financial Services and its affiliates do not provide legal advice. Please consult your legal advisors to determine how this information may apply to your own situation. HD Vest Investment Services SM does not provide tax advice. Whether any planned tax result is realized by you depends on the specific facts of your situation at the time your tax preparer submits your return. The information presented is not an offer to buy or sell, or a solicitation of an offer to buy or sell the securities or strategies mentioned. The investments discussed or recommended in the presentation may be unsuitable for some investors depending on their specific investment objectives and financial position. Investors should consult with their Advisor regarding their specific situation.

2 Executive Summary 1. The North Korea situation should resolve peacefully. However, the history of appeasement by the US and South Korea makes this situation more volatile because Kim Jong-Un believes he can get concessions from saber-rattling. 2. Almost all the global economies are expecting GDP growth in While it is good to see positive GDP in almost every nation, it does suggest the economies across the globe are harmonizing. 3. In a rare example of bipartisanship, it looks like the debt ceiling will be raised with little drama. 4. Funds continue to flow out of mutual funds. 5. Hurricane Harvey may end up as the third most expensive natural disaster in world history.

3 1. The North Korea situation should resolve peacefully. However, the history of appeasement by the US and South Korea makes this situation more volatile because Kim Jong-Un believes he can get concessions from saber-rattling. a. Military action is extremely unlikely. i. It would likely mean the end of Kim Jon-Un s regime in North Korea. ii. South Korea would incur heavy casualties since 25M people live within 35 miles of the border. The US cannot expose its ally to that risk. b. North Korea has a long history of provocation and escalation before coming to a peaceful solution dating back to seizing the US spy ship, the USS Pueblo, in c. China is the key to a peaceful resolution. i. North Korea is highly dependent on China. It is estimated that 90% of Korea s trade is with China. ii. China historically has served as North Korea s protector and propped up the country since they viewed North Korea as a buffer to US ambitions. iii. China needs a peaceful resolution because of economic risk. China does approximately $700B in trade annually with US, Japan, and North Korea.

4 2. Almost all the global economies are expecting GDP growth in While it is good to see positive GDP in almost every nation, it does suggest the economies across the globe are harmonizing. a. Of the 189 countries with data, 177 of them are predicted to have positive GDP growth in 2017 including the top 46 economies. b. The driver for negative GDP growth appears, in most cases, to be country-wide instability. c. The largest economies with predicted negative GDP growth are Venezuela (-7.4%) and Iraq (-3.1%). d. Economic harmonization raises the risk of a severe global downturn. e. Economic harmonization reduces the benefit of global diversification. Gross domestic product (GDP) is the monetary value of all the finished goods and services produced within a country's borders in a specific time period.

5 3. In a rare example of bipartisanship, it looks like the debt ceiling will be raised with little drama. a. Hopefully this is a harbinger of future collaboration in Washington. b. President Trump infuriated Republican leadership by negotiating with Democrats. Presumably this was driven by a lack of confidence in the Republican party process. c. There is some discussion between President Trump and Democrats of permanently removing the debt ceiling.

6 4. Funds continue to flow out of mutual funds. a. There has been over $200B in net outflows in the past 12 months and $415B in the past three years. b. Mutual fund flow is used as a measure of investor sentiment of perceived market risk. c. Most likely, these funds flow into ETFs, as ETFs have experienced over $300B in funds inflow in 2017.

7 5. Hurricane Harvey may end up as the third most expensive natural disaster in world history. a. Current estimates of damage range from $70B to $108B for Harvey alone. b. If we include indirect damages such as supply chain disruption, the total cost from Harvey could be $190B according to Joel Myer of Accuweather. c. Harvey s impact estimated at roughly 0.5%-1% negative impact on GDP in the short-term. d. 31% of US oil refining capabilities were taken offline or dramatically reduced with Harvey and are still coming back online. However, the immediate impact was higher gas prices. e. We should expect a jobless spike. f. However, long-term reconstruction could be a stimulus. g. Insurance companies will be negatively impacted, most notably reinsurers and auto insurers. HD Vest Financial Services is the holding company for the group of companies providing financial services under the HD Vest name. Securities offered through HD Vest Investment Services SM, Member SIPC, Advisory services offered through HD Vest Advisory Services SM, 6333 N. State Highway 161, Fourth Floor, Irving, TX 75038,