Follow the Money
By Michelle Connell, CFA | 7 min read
It seems that every Wall Street expert has an opinion as to how the investment markets will ring out 2019. One person may say that the market is still cheap and should still be bought. Another expert may site the uncertainty in geopolitics and the monetary policy of the world’s central banks and say caution should be exhibited. But maybe the easiest way to determine one’s actions is to look what the actions of individual investors are telling us. You know the saying, “Show me the money.” Here’s what the hard currency of the investment markets is saying.
Selling Equity Mutual Funds
In the third quarter of this year, retail investors increased their level of selling equity mutual funds. (While the sales started in the first quarter, the volume more than doubled between the beginning of the year and September 30th.) At the same time, investors were jumping into bond mutual funds.
The selling of equity funds can be reflective of two things:
- Retail investors typically move out of equity mutual fund when the economy is in the last part of an expansion.
- This selling can also be a reflection of decreasing consumer confidence. In the U.S. confidence has only moderately weakened. The Conference Board Consumer Confidence Index® decreased in September, following a slight decline in August. The Index now stands at 125.1 (1985=100), down from 134.2 in August.
“Consumer confidence declined in September, following a moderate decrease in August. Consumers were less positive in their assessment of current conditions and their expectations regarding the short-term outlook also weakened. The escalation in trade and tariff tensions in late August appears to have rattled consumers. However, this pattern of uncertainty and volatility has persisted for much of the year and it appears confidence is plateauing. While confidence could continue hovering around current levels for months to come, at some point this continued uncertainty will begin to diminish consumers’ confidence in the expansion.”
— Lynn Franco, Senior Director of Economic Indicators at The Conference Board.
Why is consumer confidence important? In the United States, 68% of gross domestic product (GDP) comes from consumer consumption-or the purchasing of goods and services.
Across the globe, consumer confidence is not the only thing declining. The Brookings-FT Tracking Index for Global Economic Recovery combines economic activity, financial markets and investor confidence. Since early 2018, this index has been falling for advanced and emerging economies. The precipitous drop appears to have occurred when Trump made his first announcement regarding trade tariffs.
Whether the cause of the selling of equity mutual funds is byproduct of the slowing of the economy, or the plateauing of consumer confidence, or a combination of both, the point is that this area warrants watching. Note: There has not been this level of outflows from equity mutual funds since 2008.
It is important to remember, that the behavior of investors is frequently irrational. And markets are unpredictable. What’s occurred in the past may not occur now. But history should not be discounted.
Key Factors to Keep Your Eye On
- Mutual Fund Flows — Are the equity mutual funds continuing to be sold? Are bond funds seeing large inflows?
- Earnings Expectations for the 4th Quarter and Next Year — As companies start reporting their September 30th earnings, they will also provide guidance for their future revenues and profits. Listen to not just what they say, but pay attention to their tone (i.e. are they nervous?).
- Other Areas to Monitor — With an emphasis on consumer confidence also monitor business confidence, home sales, retail sales and the actions (and words) of the Federal Reserve.
Actions to Take Regarding Your Portfolio
- Review your equity positions. Is your equity allocation (or percentage) too high as compared to the risk with which you are comfortable? Do you have individual stocks that have done exceedingly well in the past 12-18 months? Consider selling at least some of the profits that you have made.
- Review your bond positions. Consider selling or decreasing the positions owned in riskier bonds including high yield, leveraged loans and companies with exposure to susceptible emerging market economies.
- Hedge your profits and downside risk. This can be accomplished through mutual funds and investment managers. Remember the bigger your portfolio losses, the harder it is to recoup them. While a 10% loss requires an 11% gain to get back to even, a 25% loss requires a 33% gain.
- Raise some cash. Hold cash for two reasons: First, if you have expenses coming up in the next 12-18 months, you don’t want to risk not being able to meet these obligations. Second, it’s always nice (and profitable) to be able to purchase investments when they go on sale. And when economies and investment markets decline, that’s when investors panic-and prices can get very attractive.
Portia Capital Management can provide an analysis of your current portfolio and to receive suggestions to mitigate your risk. Contact us today.
About the Author
Michelle Connell, CFA is the President and Owner of Portia Capital Management, LLC and one of the highest-rated finance professors in the United States, currently serving as an adjunct professor at The University of Texas. Ms. Connell works with her students and private clients to understand the value of crafting a portfolio that includes conventional products as well as alternative assets, including private equity, private debt and real estate, and allows investment portfolio creation with greater downside protection and more consistent returns.