Path Toward Prosperity, July 2018

Up and Down, Up and Down

Hovering around flat for the year

What is more powerful?

Are you prepared?



The first six months of 2018 are in the books.  As always, I think it is important to take a look at the progress, or in this case lack thereof within different asset classes.  For the most part, global asset classes were slightly negative for the first half of the year.  The U.S. S&P 500 eeked out a slight gain.

After abnormally low volatility in 2017, volatility has begun to increase in 2018 but is still either at or below historical averages.  That means that investors who have been in the markets before 2013 remember that unlike in 2017, markets that move up and down are quite normal.  In markets, like life, very little moves in a straight line.

President Trump has stuck to many of his campaign promises to shake things up in Washington, but I don't think many thought it would be to this degree.  Usually, campaign rhetoric is toned down once a candidate moves into office.  This particular candidate has been a wild card....and markets are generally uneasy about unpredictability.

In 2018, positive business outlooks, fiscal stimulus via corporate and individual tax cuts, and low interest rates have been offset by unstable labor policy (immigration), tariffs and "trade wars", rising inflation and a stronger U.S. Dollar.  In fact, according to the U.S. Treasury Department, in the first eight months of the fiscal year, the budget deficit widened by 23% year over year because of lower tax receipts and increased government spending.

What type of effect this has on financial markets is anyone's guess.  However, making investment decisions based on the person in office has generally been a bad move.

Instead, I encourage you to revisit your long-term plans, revisit your risk tolerance, look at global valuations and allocate appropriately for your situation.  Here is a look at various asset class returns through June 30, 2018.


-1.67% - BloomBarc Aggregate Bond Index

-0.13% - MSCI All Country World Stock Index

-2.75% - MSCI EAFE (Europe/Asia/Far East) Stock Index

-6.51% - MSCI Emerging Market Stock Index

+2.65% - S&P 500 Stock Index (with Dividends) but -5.38% from January closing High.

-0.73% - Dow Jones Industrial Average Stock Index with Dividends

-3.90% - Gold Price


Source: MSCI, Standard and Poors, 


When I was working for my old firm, I used to be inundated with short-term focused fundamental research from the research department. "Reasons" why a stock or sector or asset class should do this or that over the next 3- 6 months.  I periodically read those reports and was always amazed at the salesmanship of "price targets" and how a stock or sector should do this or that.  In my opinion, it was great Wall Street sales, but of little substantive value.

What they were really saying was that this stock or that sector was going to decide to move in a certain direction because the reasons for it to do so are stronger than the reasons for it to move in the opposite direction.  Essentially, their "reasons" for moves were based on thoughtful logic.

Every time you believe that a stock, sector or market will move because of a certain "reason", you inherently believe that the market moves logically and rationally.  But, in my opinion, this is a false premise.  Believing you can "reason" with the market, which is clearly an emotional environment seems similar to when I argue with my wife when she and I are being emotional.  That never works well for me.  A much better tact, is, Yes Dear!

Most people I talk to about financial markets are very concerned with how the tariffs and trade wars are affecting the stock market.  The bears have been pounding the table that this could break the markets.  This talk has been going on all year and the market has basically ignored any negative implications; catching many by surprise.

Further, many bulls have extrapolated recent corporate profits and low, reported unemployment into the future.  They believe that profit growth will continue and low unemployment means the economy is running efficiently.  If this is the case, why aren't we accelerating higher?

In my opinion, there are much more important determinants of investment returns to be concerned with.  One of those is sentiment toward the market or said another way, investor's attitude toward taking on risk.  When money is too cheap for too long, companies and individuals have always done stupid stuff.  Companies tend to make bad deals, but we will not know until the next recession hits how bad the deals are.  GE is the poster child currently for the bad deals they made in the past.

According to Evergreen Gavekal, the world has increased debt by $70 trillion over the last 12 years.  We are now significantly higher than we were pre-crisis.  Much of that debt was used in corporate buybacks, mergers, and acquisitions.

The reality is that major stock market peaks are put in when unemployment is very low and profits are high, NOT when unemployment is high and profits are low.  The market also always looks cheap when looking at forward valuations and expensive when looking at past valuations near peaks.  This is because investors extrapolate the recent past to continue.

Investment Researcher and Professor Peter Ricchiuti recently said, "You're better off investing when things look miserable."

I take that quote to heart. When looking to allocate investment dollars, the best investments may potentially be made in assets where others loathe them.  The worst investments may sometimes be made when everyone is in agreement that they are good investments.

Just think back to 2006.  At that time, buying and flipping real estate was a no-brainer.  Well, if you had brains you would have realized the risks involved at that time and the music would stop playing.

Likewise, in 1981, most people wanted the 13% interest on some interest-bearing accounts and not the 17% rates for 30 Year U.S. Treasuries or investing in stocks near extremely low historical valuations.  Boy was that a missed opportunity to massively increase wealth.

In my opinion, when building an investment portfolio or thinking about deploying capital, often the best moves are the ones that are the hardest to do.  Being conservative when everyone is greedy and being greedy when everyone is conservative.




Another important metric to watch is the direction if inflation.  While I don't believe a significant breakout of inflation is around the corner, I do believe that most investors are woefully underprepared if one were to occur.

As we discussed earlier, unemployment levels are hovering around all-time lows of 4%.  We are beyond what many economists call "full employment".  This could be because so many people dropped out of the labor force to accept increased welfare or it could be because baby boomers are retiring en masse.  It also could be a combination of the two.  Whatever, the reason, those willing and able to work are mostly employed.

If you look in the rearview mirror, you will see low inflation rates in the past decade.  Because the number of people looking for work, even with the dropouts, was larger than the pool of job openings, this logically meant stagnant wages.  I heard this term multiple times in the "interrogation" of new Fed Chair Jerome Powell on July 19 by Congress.  When are wages going to rise they kept asking?  Chairman Powell replied that they had begun to rise.  What?

Paradigm changes happen slowly at first and then accelerate rapidly.  Humans are often slow to recognize change until its too late.

As seen in the chart above, inflation rates bottomed a full 3 years ago.  How high would inflation have to go before we "noticed"?  By then it could be too late.

In addition to recent wage increases, more and more countries have elected populist governments.  Tired of the slow growth coming out of the last recession, countries around the world have generally elected leaders this cycle with promises to increase spending... serious fiscal expansion through tax cuts and increased spending.  Normally, that type of rhetoric is seen coming out of recessions, not in expansions.  Not surprisingly, tariffs and "trade wars" have accompanied this protectionism.  PIMCO Investments looked back in history and found that in every scenario where the U.S. replaced imports with domestic production, inflation moved higher.

What does this mean for portfolios?  Potentially a lot.  Most investors have become reliant on the generally negative correlations of stocks and bonds during recessions.  Often, bonds have provided some capital preservation and dampened volatility during economic downturns.  In fact, this is often the basis for how most advisors and investors create portfolios.  The key is that this has been the case when inflation is low or falling.

What about when inflation is high or rising?  It could imply a change in correlation between major assets by causing both stocks and bonds to be depressed at the same time.

In my opinion, if you haven't already, you should consider adding an allocation to assets that respond well to a rising inflation environment.  Those assets generally had a solid 2017 and have pulled back some in the first half of 2018.  Inflation-linked bonds*, commodities, real estate investment trusts (REITs), Emerging Market stocks, or other inflation-fighting alternative assets** may be a way for you to further diversify your portfolio and potentially benefit if an inflationary period appears.

*It's important to remember, Treasury inflation-protected securities (TIPS) help eliminate inflation risk to your portfolio as the principal is adjusted semiannually for inflation based on the Consumer Price Index – while providing a real rate of return guaranteed by the U.S. Government.
**Alternative investments may not be suitable for all investors and involve special risks such as leveraging the investment, potential adverse market forces, regulatory changes and potentially illiquidity. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.


  • Rather than trying to “beat the market”, focus on beating inflation and the rate on cash.  Plan for safety and liquidity while seeking positive returns.


  • Equity valuations are very rich but masked due to the distortion of the Treasury curve. Volatility is returning to the markets and I think long/short managers are best positioned to capture this volatility by owning companies with strong businesses, barriers to entry, and good valuations and selling short weaker companies with high debt loads that have risen sharply with the broad market rally. I think this strategy of hedged equity may have the potential to produce attractive risk-adjusted returns if and when investors begin to question the valuations of companies. Stock investing involves risk including loss of principal. No strategy ensures success or protects against a loss. Long positions may decline as short positions rise, thereby accelerating potential losses to the investor.


  • Monsoon country investments. Attempting to take advantage of demographic, educational and investment possibilities in the countries surrounding the old spice routes of the Indian Ocean. International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.


  • A potential U.S. infrastructure upgrade cycle may be around the corner. Moving from our current grade of D+ to B would require an investment of $3.6 trillion by 2020.


  • Supply problems remain high across the energy asset class. While there isn’t a current shortage of energy on the planet, it is taking more and more energy and capital to discover, drill, transport and refine it. Long term Demand should continue to grow globally, particularly in China, India, and other developing countries.


  • Potential food shortages due to inclement weather and higher demand from the emerging Asian middle class could result in a boon to agricultural land and potash fertilizer companies. International and emerging market investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.


  • The rise of E-Commerce has coincided with an increased desire for efficient warehouse distribution real estate. As e-commerce moves toward even faster delivery, positioning of distribution becomes even more important.


  • Precious metals mining companies have been extremely beaten down over the past four years. Mining is an industry that spans hundreds of years. Companies that mine for commodities are often highly cyclical, meaning they have sustained moves both up and down. When investing in the mining space it is important to be a contrarian. Ideally, you would want to accumulate miners when sentiment is poor around them and sell them when sentiment is positive. Historically this has been a good strategy.


No strategy ensures success or protects against a loss.



Colin B. Exelby
Celestial Wealth Management

Important Disclosures
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  • The fast pricing swings in commodities and currencies may result in significant volatility in an investor's holdings.
  • There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio.  Diversification does not protect against market risk.
  • Because of their narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.