What is Political risk in investments and the market?
When investing there are several types of risks involved. Today, we have an example of a unique type of risk: political risk. Political risk is when an investment’s value can decline due to political policy changes or instability in a country. We don’t worry about instability in the US as much as policy changes. The market attempts to price in Fed funding and when that happens money flows to companies that are speculated to benefit the most. One way is through the Fed pushing money through the market, and another would be through a US Congressional stimulus package agreed upon by the President. If there is an unexpected outcome there is typically volatility. At the recording of this VLOG, the day after the election, we did not know the outcome of the presidency because all of the votes were not counted in the final key states. At the writing of this article, it seems that Joe Biden will be the next US President, the Republicans will keep the Senate, and the Democrats will keep the House. If this is the case for the next 2 to 4 years then we have gridlock in Washington. This typically means that economic packages, infrastructure bills, stimulus agreements, etc. tend to be smaller because the two parties cut out each other’s biggest ideas. Is this good or bad for the markets and economy? It is hard to say. Often the markets like gridlock in Washington because the rules tend to stay the same and the government stays moderate. In this case, only time will tell.
What is our investment strategy in this environment?
We see the potential to move into opportunity zones in the fixed income and our economic/gold rotation strategy. First and foremost, we are still in a hyper-overvalued market when it comes to prices vs. earnings in the market so we want to be careful. However, at the writing of this, we believe we could be seeing a rotation from growth to value which could fit our strategies well. Therefore, as we are seeing the markets move it gives us answers to previous unknowns. (Again, we are writing this a few days after recording the VLOG.) If we know who is in leadership in Washington and there is a vaccine to COVID-19, two big questions are answered. Whether we are seeing a rotation out of growth into value or a flight to safety, we believe our signals will pick this up. Therefore, we are beginning to invest in our Dynamic Fixed Income and Economic/gold rotation strategies. Each of these has a rules-based signal that can move the strategy between growth-oriented investments and relative safety. We will explain these two strategies more thoroughly in next week’s recording.
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The opinions expressed are those of Sound Financial Strategies Group, LLC (“Sound”). The opinions referenced are as of the date of publication and are subject to change without notice. This information is not a recommendation to buy or sell a particular security or to invest in any particular sector. Forward-looking statements are not guaranteed. Sound reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs, and there is no guarantee that its assessment of investments will be accurate. Information was obtained from third-party sources which we believe to be reliable but are not guaranteed as to their accuracy or completeness. This information is not intended to be investment advice and does not take into account specific client investment objectives. Before investing, an investor should consider his or her investment goals and risk comfort levels and consult with his or her investment adviser and tax professional.
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