What to Do in an Uncertain World

After the election of Donald Trump as President, the markets surged and continued to increase after he was sworn into office. But in the last few weeks, reality has set in as the repeal and replacement of Obamacare went down in flames, and now tax cuts are looking less and less certain.

Stock market Correction
By Katrina.Tuliao (https://www.tradergroup.org) [CC BY 2.0], via Wikimedia Commons
Market Correction

In addition, interest rates are going up. Add to that the foreign policy crisis with Russia after the US bombing of Syria, and rapidly escalating tensions with North Korea.

The stress on the stock and bond markets is increasing quickly and many are worried about the possibility of an imminent downward correction (or worse), especially since we haven’t had a major correction in many years.

What happens in the coming months is far from certain and many investors are very nervous.

Wouldn’t it be nice to have some strategies in your portfolio that are not highly correlated to the stock and bond markets, just in case the worst happens? Fortunately, there are some options we’ll share with you today. But first, let’s look at the increasing risks the markets are currently facing.

Reality of Governing Sets In

One of President Trump and the Republicans’ big promises was the repeal and replacement of Obamacare. As we all know, their first attempt failed miserably. It’s very possible they will not be able to come together and agree on an alternative approach. So what does that mean for the economy?

Many analysts agree Obamacare will eventually implode if nothing is done to fix it. Healthcare is a big part of the economy, and a failure of this magnitude could have a significant impact on the markets.

In addition, perhaps one of the biggest reasons for the stock market’s surge is the promised cuts to corporate tax rates, as well as cuts to individual tax rates. Keep in mind that part of the reason the GOP started with the repeal and replacement of Obamacare is that they were planning to use some of the savings from their healthcare changes to help pay for the tax cuts. With no such savings now available, it will make passing tax cuts even more difficult.

Republican leaders had hoped to have tax cuts finished by August. Now many are saying that’s just not realistic anymore. It could be the fall or even later before anything is done on this. Republicans disagree on a number of things, including the size of the cuts, how to pay for them and some more controversial proposals like the Border Adjustment Tax.

The future of the infrastructure spending bill is also uncertain. This would pump billions into the economy on so-called “shovel ready projects.” It remains to be seen though if the Republicans can come up with something that can pass both Houses of Congress.

These promises are a big part of the reason for the market’s surge after Trump was elected. Failure to accomplish any of these could impact the markets in a negative way.

Interest Rates Are Going Up

In December and then again in March, the Federal Reserve raised interest rates. They also indicated they plan to have at least two more rate hikes this year, and potentially three next year. Rising interest rates increase the costs for companies to borrow money. Many existing loans are tied to the LIBOR so when rates increase, so do the costs for companies to service their debt.

Furthermore, the Fed recently warned about weakening credit demand and tightening lending standards, which will make it more difficult to get a loan. Companies often depend on loans to fund expansion projects. When the availability of credit declines, it is usually not good for the stock and bond markets.

And let’s not forget that the US has a $20 trillion deficit. When interest rates go up, so does the cost to service this debt. This makes even less money available for government spending projects.

Hotspots Around the Globe

In addition, there are a number of global hotspots that could weigh on the markets. The limited US strike on Syria has caused concerns over escalating US military involvement in Syria and elsewhere. It has also put a big strain on US-Russia relations, which were already at a low-point. Any type of direct US and Russian military conflict could have a very negative impact on the markets.

It could also weigh heavily on the energy markets. Conflicts in the Middle East often push energy prices higher. And don’t forget Russia has vast energy resources. Rising energy prices often are not good for the markets.

North Korea is also a major hotspot, given that they have a nuclear weapons arsenal and a nutty leader who might just be crazy enough to use them. Any confrontation between the US and North Korea could escalate very quickly, and the result could be very negative for the stock and bond markets.

Add to that the strain it would put on US-China relations, which would likely impact trade. President Trump has sharply criticized China for unfair trade practices, and any problems between the US and China, especially with growing tensions with North Korea, could lead to a trade war with negative global implications. Remember China has the second largest economy in the world.

Are We Past Due for a Correction?

The US has just completed its eighth consecutive year of economic growth. For reference, the average post-World War II recovery period averaged just 61 months, roughly five years. Private jobs have grown for 85 consecutive months. The markets recently reached all-time highs. The last really significant market correction was during the 2007-2009 time-frame.

Many believe the markets are past due for a correction. This recovery is getting long in the tooth, so it may not take much for it to turn lower, perhaps significantly. Remember, the S&P 500 lost over 50% from 2007-2009.

When the markets are close to all-time highs, and there is a great deal of uncertainty, they can be more susceptible to negative news or events. It often doesn’t take much to cause a big move in one direction or the other.

The Need to Diversify in This Uncertain World

Most everyone reading this understands how important it is to diversify your investment portfolio. With the fate of Obamacare and tax cuts unclear, interest rates rising, tensions increasing around the world and the stock markets at or near all-time highs, there is a great deal of uncertainty in 2017. This makes diversification even more important.

Yet proper diversification today requires more than a traditional allocation to stocks and bonds, since they can both suffer when markets drop. It requires alternative investments that are not highly correlated to the stock and bond markets, ones that can potentially do well even if the markets drop. And if the markets keep going up, you want strategies that can still prosper.

So what’s an investor to do?

Investors Need Options: We Have Them

Fortunately, Halbert Wealth Management has three new strategies which have delivered impressive results without investing in traditional stocks or bonds. All of these investments are not highly correlated to the stock markets, so they have the potential to do well even if the markets drop. They

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