Eight Risk Factors That Could Impact The Markets

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Eight Risk Factors That Could Impact The Markets…And What You Can Do Now To Help Protect Yourself

Since President Trump’s election in November 2016, the markets have been mostly up, rallying to new high after new high. That is until the market meltdown in late January – early February of 2018, which resulted in a correction of about 10%. The markets have mostly been struggling since then, and no one knows where we go from here.


Q1 hedge fund letters, conference, scoops etc, Also read Lear Capital: Financial Products You Should Avoid?


The sudden correction earlier this year left many investors wondering whether this bull market rally that originally started in 2009, and accelerated after Trump’s election, is nearing an end, and if the recent 10% drop was the beginning of something more serious.  Remember, the last bear market was 2007-2009. Many believe we are past due for a more significant market drop, especially after the massive stock price gains we’ve seen since 2009.

Or was the 10% correction earlier this year just the markets taking a little breather, before they go on to soar to new heights? After all, the economy appears to be solid, and consumer optimism is very high. This leads many investors to think the markets will continue to move up and push this bull market rally even higher.

Unfortunately, there is no way to know for sure what will happen next. So what’s an investor to do? Buy stocks (or keep the stocks you already own), and hope the markets continue to climb, and that the recent 10% drop wasn’t the start of something more serious? Or should you get out of stocks, and hope you don’t miss out on the gains if the markets continue to climb?

Then you must decide where to invest your money. Money markets earn next to nothing, and bonds have been taking a beating lately. Not an easy choice.

Yet there are some attractive alternatives to stocks and bonds, which we’ll get to later in this report. But first you need to understand some of the factors causing all this uncertainly in the markets, factors that could ultimately drive the markets down. This Special Report will outline eight factors that could weigh on the markets and may determine whether markets continue to soar even higher, or if a bear market is just around the corner.

Knowing and understanding the challenges facing the markets can help you plan for the future. At the end, we’ll discuss some strategies you can use now to be ready, whether the markets go up or down in the future. But first, let’s take a look at some of the factors that may impact the markets going forward.

#1 Stock Valuations are High

Since the end of the Great Recession in 2009, stocks have been mostly up, except for a couple modest and short-lived corrections. Since its low in 2009, the S&P 500 Index is up over 300%. The S&P 500 gained nearly 25% in President Trump’s first year in office.

If you look at individual stocks, some are trading at extremely high price/earning ratios, including Amazon and Netflix which often have PEs above 200. Some say this is justified because of their potential for future growth. Others say many of those stocks are way overvalued, and past due for a major price drop.

As many stocks surge to record highs, keep in mind that it just takes a little bad news to send a company’s stock price plummeting. For many of these overvalued stocks, negative news could result in some dramatic drops in share price.

#2 Increased Volatility in the Markets

Market volatility has spiked in 2018. Market volatility basically measures how much or how quickly the markets move, in a positive or negative direction. A more volatile market will generally have larger price swings, both up and down, than a less volatile market.

The VIX Index, which is a measure of implied equity market volatility, has been up sharply. On February 5th, the VIX Index increased by 116%, which was the largest one-day percentage change in history.

Volatility is generally a reflection of uncertainty. When volatility increased in February, some investors viewed this as a buying opportunity. Others, however, were concerned that this was just the start of something worse, like the beginning of a bear market.

Going forward, higher volatility means any financial news or events around the world could have a bigger impact on the markets than in the recent past. Negative news could push the markets down in a much bigger way and much quicker. Markets don’t like uncertainty.

#3 The Current Bull Market is Getting Old

The current bull market in the S&P 500 turned nine years old on March 9th. It is now the second longest and also the second largest (in terms of percentage gains) in history. If it continues until September, it will be the longest in history, surpassing the record set in the 1990s.

While the current bull market could go on to set the record for the longest in history, it certainly has many investors wondering how much longer it can last. This could make investors nervous and more likely to bail out at the first sign of trouble.

Another thing to remember, ultra-low interest rates have helped fuel this bull market. With interest rates moving higher, the supply of cheap money that helped fuel this market to new highs is drying up. It’s uncertain whether the markets will be able to continue their surge without the benefit of all this cheap money pouring in.

#4 Tariffs and Trade Wars

As he said he would during the campaign, President Trump has started to get much more aggressive when it comes to US trading policies. Many believe that countries like China take advantage of the US and run huge surpluses as a result. This has resulted in lost jobs in the US, especially in the production sector.

President Trump has already pulled out of the Asia-Pacific Trade Agreement, among others. His people are working to renegotiate NAFTA and trade deals with individual countries like China. The question is, will they succeed, or will the result be more tariffs and a trade war.

Trump also announced tariffs on steel and aluminum imports, though some countries have been exempted. The European Union is threatening to retaliate. He has also announced sanctions against China, which led to swift retaliation by China.

In addition, tariffs increase the cost of many products that are imported by the US. Part of the reason we import so much from China is because they can make products for a lot less than we could make them here. If tariffs are implemented, prices for many of the products you buy could increase – or if companies absorb the additional costs, their profits will go down. Also, when China retaliates, the prices of our products sold to China go up, which usually leads to lower exports.

The threat of tariffs and trade wars is not good for the markets and causes a lot of uncertainty, especially since no one knows where it will end. Again, markets do not like uncertainty.

#5 Interest Rates Are Rising

The Federal Reserve raised the Fed Funds rate in March, following three rate hikes in 2017. At least two more rate hikes are expected in 2018. The new Fed Chairman has even said three more rate hikes are possible in 2018 if inflation heats up. Plus, three additional rate hikes are expected in 2019.

Keep in mind that low rates help stimulate the economy and make it easier for businesses to expand. They also are a boon to the housing market. The 30-year mortgage rate had been around 4% or less for many years. Now it’s around 4.5% and headed higher. Naturally, this has made home buying less attractive. As mortgage rates continue to climb, expect it to impact the housing markets in a negative way.

Increasing interest rates are also bad for bond values. When interest rates go up, bond prices generally drop. So, what happens as the Fed continues to raise rates this year? Rising rates will take a toll on bond prices as well. If bond values drop, balanced funds and institutional investors are often forced to sell equity positions and buy bonds to re-balance their portfolios.

In addition, higher interest rates make it more expensive for businesses and individuals to borrow money, which can slow down economic growth. Less growth leads to lower profits for many companies. This in turn often leads to lower stock prices.

#6 The Trump Tax Cuts: Will They Work?

After many ups and downs, Congress finally passed significant personal and corporate tax cuts. While the mainstream media claimed the tax cuts would mostly benefit fat cat CEOs and billionaires, the truth is most people have seen their taxes go down. This often results in increased spending which stimulates the economy.

In addition, the corporate tax cuts will leave companies with more money to spend. Many corporations have already announced bonuses, wage increases and plans to expand production. How companies choose to spend their tax savings will have an impact on future growth.

Part of the market’s big rise since Trump was elected is anticipation of the tax cuts and how they would boost the economy. But no one really knows how much they will help. If they turn out to stimulate the economy less than expected, the markets could suffer as a result.

It will be crucial to see how the economy grows the next few quarters, as the tax cuts start to impact consumer spending. Hopefully, they will boost the economy in line with expectations. If they do not, that could be very negative for the markets.

#7 Geopolitics: North Korea, Russia and Terrorism

There is no shortage of trouble spots around the world. One of the most dangerous of these is North Korea. As their nuclear and missile technology continues to advance and get more dangerous, the likelihood increases of a miscalculation or confrontation with the US, Japan or South Korea.

President Trump has insisted that North Korea not be allowed to possess nuclear weapons that threaten the US. Kim Jong Un shows little interest in backing down, despite the proposed upcoming summit with Trump. The summit could result in a path toward the de-nuclearization of the Korean Peninsula (unlikely), or failed talks could bring us one step closer to war with North Korea.

Relations between Russia and the US are at a decades long low point, and there seems to be no improvement in sight. Their presence in Syria has made the situation worse and increased the likelihood of military confrontations with the US. The ongoing diplomatic expulsions have made relations deteriorate even further.

Next, while ISIS is on the run and losing more and more territory every day, they remain a dangerous threat. They will likely become more desperate as their caliphate shrinks, putting more pressure on them to carry out a big attack to make sure they remain relevant.

There are lots of other trouble spots around the world that could cause problems, including Iran and Yemen.  President Trump announced the US was pulling out of the Iran agreement. There’s no telling what the implications of that will be. In Yemen, the conflict there between Iran and Saudi Arabia could escalate, which would further destabilize the region.

There is a lot of uncertainty in the world today, and the markets don’t like uncertainty.

#8 U.S. Federal Debt: Out of Control

The US federal debt recently surpassed $21 trillion and it continues to grow. As you know, the government runs a budget deficit each year which adds even more to the total national debt. Before you can even think of paying down the debt, you have to balance the annual budget in order to stop the total debt from increasing. Then, any surplus can be used to pay down the national debt, assuming Congress doesn’t spend the surplus. In the meantime, the government must pay interest on the debt, which was $266 billion in the 2017 fiscal year (ended September 30, 2017).

Speaking of interest on the debt, now that interest rates are on the rise, the amount of interest due on our national debt will increase. Just do the math. A 0.25% hike in interest rates will eventually increase the annual amount of interest we owe on the debt by over $52 billion.  As debt matures and is replaced by new debt, the government will have to pay higher interest rates to borrow that money. A 1% rate hike eventually increases the annual interest expense on our debt by approximately $200 billion. It only gets worse as interest rates increase.

In addition, Trump has promised to spend hundreds of billions of dollars on infrastructure, and both corporate and personal income tax rates have been slashed. Unless these are paid for with spending cuts or increases in tax revenues, they will add even more to the already massive national debt. The Congressional Budget Office recently estimated that the annual budget deficit will rise to above $1 trillion in FY 2020 and stay above that for the foreseeable future.

What You Can Do Now to Help Protect Yourself

Each of these eight factors has the potential to have a significant impact on the markets and your investment goals, especially if more than one turns negative at the same time – which is a very real possibility. On the other hand, the markets could continue to surge and hit new highs.

With all this uncertainty in the markets, no one knows whether the markets will drop lower, or rebound to new highs. You could just sit it out on the sidelines, but what if the market climbs to new highs? Plus, if you stay on the sidelines, you’ll be earning next to nothing in money markets or savings accounts. You probably won’t even keep pace with inflation.

But if you stay in the markets in a buy-and-hold strategy, and the markets drop, your investments will likely drop as well. Remember, the S&P 500 lost over 50% from 2007-2009. Keep in mind that if you lose 50%, you have to earn 100% just to get back to breakeven. That could take years.

Introducing ZEGA’s “ZBIG” Strategies

For many years, ZEGA Financial has been using options with the goal of taking advantage of equity market gains, while also limiting the downside risk should the markets turn south. In 2016, ZEGA developed their new ZBIG Strategy, which takes risk management one step further.

This unique strategy uses options to participate in market gains, plus hold-to-maturity corporate high-yield fixed income ETFs as a buffer to help protect against downside risk. Both the option expiration and the fixed income maturity dates are aligned with expirations of 18 to 36 months. The goal is to help reduce or even eliminate some market losses should the markets drop.

There are three different versions available – Leveraged, Standard and IRA. Each one has a different risk/reward potential.

With these three different options, you can select the one that is right for you, based on your risk tolerance. If you’re willing to take more risk, you have the potential for higher returns in the Leveraged Strategy. And if you want to strictly limit your risk, but still have the opportunity for attractive returns, the IRA Strategy might be a good fit for you.  Or if you want something in between, the Standard Strategy might be right for you.

Keep in mind that there are no guarantees that these accounts will not experience any losses.

With all the risks to the markets outlined in this Special Report, and all the uncertainty about where the markets are headed next, having one of ZEGA’s ZBIG Strategies in your portfolio can help you make money, but with a buffer designed to protect you should the markets go down significantly. Plus, you get the peace of mind knowing that investment professionals are managing your money. To learn more about Halbert Wealth’s ZEGA ZBIG Strategies, you can:

  • Call us at 800-348-3601
  • Download the ZBIG Fact Sheets
  •  Register for our ZBIG Webinar on May 22nd

We also have unique strategies that are only available to accredited investors. If you are an accredited investor, let us know so we can share more information with you.

If you are searching for income strategies that are not highly correlated to the markets, we also have several new programs that may be of interest to you. Contact us for more information about our Managed Strategies program.

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