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Managing Risk in the New World

Admin Feb 28, 2017 12:00:00 AM

Scott and Company Advisor>Volume 2 Issue 2

What a difference just a few years, a few weeks, or even a few Tweets can make. Ever since the turn of the century we’ve experienced a rapid boom in technology, the real estate and banking collapse, one of the longest stock market bull runs, the worst economic recession since the Great Depression, and the most inflammatory and controversial presidential election in U.S. history. During this time, economists have popularized phrases like black swan, crony capitalism, quantitative easing, gig economy, new normal and Brexit. Moreover, we now live in the Trump Era, wherein a 140-character Tweet can move markets and unnerve global leaders. To manage the perils of this era, investors must first recognize new risk factors and even prioritize which ones they believe are most detrimental to their personal portfolios. The following is an overview of some of the risks at stake today. Interest Rate Risk Interest rates appear to be on an upward trend after a decade of near-zero levels. At the end of 2016, the Federal Open Market Committee increased the benchmark rate to a range of 0.5 percent to 0.75 percent, with guidance projecting three more rate hikes for this year. Fixed income investors should be aware that new bonds on the market will feature higher yields, which will cause the price of existing bonds with lower yields to drop. Bear in mind, however, that holding bonds to maturity will continue the current level of income received. Bond fund investors will likely see an initial dip in prices, however over time they can benefit from new higher-yielding bonds gradually entering the fund mix without losing principal. Global Trade Risk In an effort to reform trade policy, President Trump has already scrapped the Trans-Pacific Partnership agreement and indicated that he will renegotiate America’s involvement in the North American Fair Trade Agreement between the United States, Canada and Mexico. While the Administration’s goal is to reintroduce jobs and capital investment in the United States, the longer-term impact of more restrictive trade could be higher tariffs on imports, resulting in higher prices for consumers. For investors, while emerging markets are expected to suffer, U.S. manufacturers could generate higher real capital investment and accelerated growth. A lower corporate tax rate also would make U.S. companies more competitive on the global landscape. Productivity Risk Trump has promised to create new jobs through policies to repatriate American manufacturing and increase infrastructure spending. However, his stance on immigration could make it more difficult to fill those jobs. Consider these demographic realities:

According to the Insured Retirement Institute, baby boomers will continue to retire at a rate of 10,000 a day through 2030.
Many of today’s baby boomers work in fields that don’t appeal to younger adults, such as trucking, sales and anything 9-to-5.
Boomers that remain in the workforce might find themselves behind the skills curve, competing more and more with techno-wise young adults.
If and when offshore jobs return to the United States, they’ll likely be more high-tech. Assembly workers will be replaced by automation, so manufacturing jobs of the future might require a technology degree.
The future of labor quality could be impacted by the numbers of unemployed and under-employed college-educated young adults; their lack of practical work experience could make it difficult for employers to fill new jobs.
Lack of qualified candidates could reduce growth, expansion and productivity, while wage growth to compete for the best workers might further exacerbate income inequity.

Political Risk Normally we associate political risk with more volatile countries plagued by civil unrest. These days, the United States and other developed nations are starting to fit that bill. Just two weeks into his presidency, Trump has proven to be a disrupter in polices ranging from foreign trade to domestic regulation. While his goal is to reduce frivolous government and corporate spending, the initial impact could lead to extensive job losses in the public sector and rouse further civilian protests. While he has majority support in both Congressional houses, Senate Democrats still have the power of filibuster to block regulatory repeals by picking their battles carefully. Obviously, this is not the usual transfer of power between party administrations. Due to his combative nature, every effort Trump has advanced thus far has elicited protests, global concern, resignations from top officials, lawsuits filed against cabinet nominees – and we’re only starting to hear about potential conflicts of interest associated with his vast international business deals. While Trump promises fast action, these and other as yet unknown obstacles could make for a presidency fraught with long, drawn-out battles, litigation, volatility in the markets and sluggish economic growth. However, the problems of the government should not be those of the average investor. The key to navigating risks of the new order is to set personal financial goals and devise the most achievable plan to meet them. While investors will likely consider how today’s new risks could impact portfolio performance, the key is to deploy risk-mitigation strategies, use benchmarks to track progress and maintain a long-term perspective. Be sure to talk with your Scott and Company advisor for help with your financial plan.