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Stay alert when investing, regardless of health of economic growth
WHEN it comes to how the latest economic data could impact investors, two opposite interpretations emerge.
Growth of 4.1 per cent in the second quarter is a sign of a buoyant economy set to keep growing for years to come, continuing a nearly decade-long expansion since the financial crisis in 2008.
Or growth of 4.1 per cent in the second quarter is a short-term blip brought about by tax cuts that gave people a little extra money in their paycheck but is unsustainable in the face of mounting federal debt, higher tariffs and the prospect of a trade war that could hurt large portions of the US economy.
Last Friday, the Labor Department released the jobs report for July, showing the economy added 157,000 jobs - fewer than the expected gain of 190,000. The jobless rate dropped to 3.9 per cent, suggesting slack in the labour market, but wages are growing slowly.
Your takeaway depends on your overall view of the country and the economy.
"In 23 years of doing this, I cannot really remember a time when a statistic comes out and you hear such diametrically opposed interpretations of it," said Andrew Crowell, vice-chairman of wealth management at DA Davidson and Co, which manages US$48.2 billion. "There is no grey zone. It's only black and white, which makes it an interesting time to be an investor."
Who is correct on the data will not be known until the economic impact is felt, which could take months or even years. But for investors, any plan based on waiting or wishing is not ideal.
After all, beginning even before President Donald Trump began to shake up economic norms, with his criticism of the Federal Reserve, threats of tariffs and nonchalance about government debt, investors have been sceptical of the economic expansion, which has run, with a few minor dips, from March 2009 to the present.
A wait-and-see approach on investing can be costly, but moving too quickly at this stage could be ruinous if the market goes into a correction. Advisors to some of the country's wealthiest people say keep investing, but do it wisely.
Here are four tips for investors in a time of caution:
Diversify your portfolio
Mr Trump has made many comments that in a different time would have caused the economy to tank. Military threats against North Korea and Iran, tariffs against the US's largest trading partners, all manner of statements about Russia - none of them has caused a market correction.
Instead, the opposite has happened this year, as investors find opportunities in market fluctuations. "We've seen cash come in to buy on the dips," said Mr Crowell.
And for a seemingly sound reason - companies continue to grow. The Republican tax cut that was enacted last year and a roll-back of financial regulations have helped, but so, too, have strong earnings that have outpaced price increases.
"The stimulative measures have bolstered confidence that growth, and the economy is going to be strong over the next couple of years," said Mr Crowell.
Advisors agree that the recovery has been running for some time and is near the point where bull markets typically begin to falter. But that does not mean the run will end this year or next or even the year after that.
"Consumer wealth is at all-time highs when you factor in home prices and the stock market," said Henry Smith, co-chief investment officer at the Haverford Trust Co, which manages US$8 billion. "One of the lacking ingredients throughout this has been business investment, and that is starting to pick up."
Be aware of opportunities
Many investors seem willing to forget that the returns of the past decade have been strong and that replicating them going forward may be difficult. In other words, stay invested in riskier assets while they continue to run, because selling them too early could hurt your portfolio.
"When we look at demographics and economic projections, there isn't going to be as much population growth and consumption," said Anthony Roth, chief investment officer at Wilmington Trust. "Most of the world has a population moving to slower consumption as they age. While this economic cycle is continuing, the risk of missing out is even greater."
He pointed to the reaction over the flattening of the yield curve, which tracks the difference between the interest rate on short- and long-term bonds. He added that talk about the yield curve inverting - which means long-term borrowing costs become less than those in the short term - was premature.
"The strongest period of the market cycle is from the time of yield curve inversion to the peak of the equity market, which is usually nine to 12 months after that. We haven't even got to the inversion yet, which would suggest there's significant opportunity right now."
Yet investors need to pay attention. "The alarm is when the yield curve inverts," said Mr Roth. "It's a predictor of both recessions and returns in the market." Actively monitoring economic data and what it presages is a smart strategy.
Pick recession-resistant stocks
Most analysts believe Mr Trump is bluffing on tariffs and that they are being used as a negotiating tool. This comes from the school of thought that favours what the president does over what he says.
For instance, after saying so many harsh things about European trading partners, Mr Trump embraced Jean-Claude Juncker, president of the European Commission, just last week.
"The worst case is, Trump just gets in a fight with China, Europe and everyone else, and we see an escalation of tariffs that slows world trade and has a significant impact on the US economic cycle, increases inflationary pressures and ultimately reduces output," said John Osterweis, chairman and chief investment officer of Osterweis Capital Management, which manages about US$7 billion.
That would be crushing, but it is not the only possible outcome.
"The flip side is, Trump really is a master negotiator and what he's doing is trying to move away from multilateral trade agreements to bilateral agreements," he said, adding that may produce better trade deals.
Consider the tax implications
Facebook's loss of nearly 20 per cent of its value in one day was substantial. But Mr Crowell said it should not cause people to run from the Big Tech stocks like Alphabet, Amazon, Facebook and Netflix.
What it should do is get people thinking about the need to examine their portfolios. "It's prudent to be mindful that those four names don't define a diversified portfolio," he added.
Another reason not to sell off stocks that have appreciated greatly is taxes. People who have held those stocks for a long time have watched them run up in value, which means they are going to owe a lot of money in taxes when they sell them.
Todd Morgan, chairman of Bel Air Investment Advisors, which manages about US$8 billion for high-net-worth families, said he shows clients how much the stock of a fundamentally-strong company would have to fall before selling it made sense.
"People don't look at the after-tax returns," he said. "I've had several calls about tech stocks the past few days, all asking, 'Should we stay in or get out?'" If an investor thinks a company is going to drop below what would be owed in capital gains taxes, then it is time to get out.
Investors need to keep paying attention to company fundamentals and economic indicators focused on inflation and wages. If either of those run too high, the Federal Reserve is likely to raise interest rates, which could bring the equity party to an end.
Since neither is happening now, the best advice is to stay invested and alert. NYTIMES