WASHINGTON. For traders and investors, it’s been risk-on, risk-off for most of June and July this year. The latest market action seems to prove the point, focused as it is on Federal Reserve policy. For most of last week, investors estimated a 150 percent chance in favor of the Federal Reserve cutting interest rates this month. But after last week’s surprisingly strong jobs report, the optimist count is down to about 20 percent and dropping.
As the gloom continued to spread, market futures pointed sharply downwards all Monday night and Tuesday morning as well. According to Fox Business, the “Dow Jones Industrial futures are down 0.4 percent, S&P 500 futures are off 0.3 percent, while Nasdaq futures were lower by 0.4 percent.”
Those numbers indicated at least a 100+ point drop would hit the Dow Jones Industrial Average (DJIA) Tuesday morning. And that’s exactly what we got at Wall Street’s 9:30 a.m. ET opening bell. As we write this piece, the DJIS continues to veer between -106 and -96 points on the morning. But the day is young.
Federal Reserve policy, interest rates, keep stocks wandering through the investment desert
Things seem to be in flux this week, and investors don’t much like that situation. Stark variables flutter ominously in the air. Federal Reserve policy and international trade issues continue front and center, as Fox Business observed.
“Fed Chairman Jerome Powell will present his semi-annual testimony to the Congress on Wednesday and Thursday. His appearance will give investors an opportunity to gauge near-term monetary policy thinking. Also, the Fed will release the central bank’s June meeting minutes on Wednesday.
“Top U.S. and Chinese officials are expected to speak this week in an attempt to jump-start stalled trade negotiations between the two nations, but many of the same tensions that undermined talks previously remain.”
Thus far, as the Tuesday morning trade develops, risk-on stocks (pretty much every sector except utilities and real estate) continue to get hit by selling, as they were Monday. On the other hand, risk-off stocks are catching bids. This makes it tough to position portfolios. Staying with riskier investments exposes you to the kind of market swan dives we experienced in late 2018 and again in the month or so after Tax Day on April 15 of 2019.
Where can you hide in an indecisive market?
If you don’t want to get caught in this kind of turbulence, you head for bonds, bond ETFs, and stock and bond ETFs in the real estate and utility sectors. But here’s the dilemma. Since all investors want to brag about their 50 percent return on investments (ROI) this year (Hah!), they’re inclined to go risk-on.
But then, fearing the opposite situation, they start to shift their risk-on portfolio profiles in the risk-off direction. At which point they’re horrified to learn that bonds, in particular Treasurys, are yielding closer and closer to zero. Which, of course, endangers that mythical 50 percent ROI for 2019.
Which, in turn, means that the average investor tends to sell plunging risk-on portfolio items at precisely the time they’re about to turn around and soar. And, of course, they’ll likewise dump those risk-off, bond-heavy portfolio items when interest rates are about to change direction. Clearly, our current market volatility is a curse to all but the most astute day-traders. And, of course, those high-speed algorithmic trading shops. All of whom watch Federal Reserve policy statements like a band of hawks.
What a confusing mess.
An evenly balanced portfolio. For now. Look for decent gains while limiting potential losses.
As for us, we swapped some portfolio items around, but remain fairly fully invested. Roughly half our portfolio holdings consist of utilities and relatively high-yielding preferred stocks. The latter constitute another relatively safe port in the investment storm, even though they tend to get smacked around a bit more than usual when bonds and bond ETFs suffer the same fate.
Investing in the (currently) hated oil patch
We’re probably too heavily invested in the currently hated oil patch. For us, this includes investments in fuel-related preferred stocks, namely GasLog Partners Series A and Series C preferreds (trading symbols: GLOP/PRA and GLOP/PRC at Schwab, you brokerage’s symbols may be a bit different), and a couple others.
We’re also establishing positions in Conoco Phillips (COP), Marathon (MRO) and mega-refiner Valero (VLO) as well as well-performing (thus far) Canadian oil sands giant Suncor (SU) and a couple additional smaller players.
We find ourselves loaded with ETFs in growth and equal-weight tech sectors, but also managed to acquire a small position in Amazon (AMZN) – the current tech/retail Master of the Universe. And at a good price, too. We are tentatively creeping back into a representative Chinese stock ETF, symbol GXC, though this one might not work.
The Allergan saga continues. Maybe with a brighter future.
And, of course, we’re still overweight on our cursed Allergan (AGN) position. Although almost overnight, we finally find ourselves with a nearly 40 percent gain in our remaining position here, courtesy of a surprise takeover offer by AbbVie (ABBV), another faltering pharma giant. Good luck to us.
Briefly surgin to $170 per share from the $120 range upon news of the offer last week, AGN shares backed off to around $165-167 per share. Still a great price to sell. On the other hand, the cash and stock value of the AbbVie takeover offer – not likely to close until 2020 – is about $188 per share. So, whatever the current AGN price, do we keep the shares and hold out for the actual offer – should it actually happen? Or should we dump the position now and run.
The latter move is tempting, given how much we lost on our earlier, larger position in these shares. But potentially missing out on an addition $20 per share profit at the takeover point – should it occur – gives an investor pause. For now, we’re in watchful waiting mode. That could change if AGN backs off much more from where it currently sits.
Back to Powell, the Fed, and everything else
As for the rest of Tuesday, we understand that once-and-maybe-not-future Fed Chair Jerome Powell is scheduled to opine before Congress today and tomorrow on Federal Reserve policy. (And, perhaps, on interest rates.)
Meanwhile, Mr. Market sits with clenched teeth awaiting some kind of oracular reading from Powell. One likely concealed within the usual Washington bafflegab. Get your simultaneous translators ready.
We just need to wait and see. And that’s today’s likely motif for traders and investors. They remain dazed and confused with information overload, and continue to fret about Federal Reserve policy, interest rates and the never-ending China Syndrome.
— Headline image: Confused by the current action on Wall Street? (Image via Pixabay.com, CC 0.0 license, public domain)