The Game Rules are Changing II

The endless 24/7 negative news cycle of politics and markets can be exhausting. This week’s news was no different than last weeks. The stock market set new records, and market commentators warned that stocks were on the verge of a crash. I hope the same news happens again next week!

As I began to write a commentary about this week’s events, I realized that I was writing the same exact post that I wrote back on August 6, 2016. That post was titled Game Rules are Changing, and it was similar to what happened this week. There were warnings from market guru’s Bill Gross and Jeffrey Gundlach that you should “sell everything”, and Warren Buffett was pounding the table to buy stocks.

On Wednesday, Warren Buffett was asked on CNBC about current market levels, and he said that tax reform wasn’t baked into the markets. This comment caught the markets by surprise and the Dow Jones Industrial Average (DJIA) subsequently rallied another 400 points. If you took Buffett’s advice back on August 6th 2016, you would have made a ton of money, and if you listened to Gundlach and Gross you would have made nothing.

I’m with Buffett that stocks will beat bonds over the long-term and that the old rule of thumb that retirement savers should subtract their current age from 100 to determine the percentage of stocks that they should own, no longer works. For instance, a 65-year-old should have 35% of their portfolio in equities. I continue to believe that today’s generation of baby boomers needs to own more stocks. However, you need to own the right investments, and that’s my job to find them for you.

Back on August 6, 2016, I was adjusting all of my portfolios away from bonds and into equities.  I am still in favor of financial and technology stocks because of the possibility that interest rates might start to rise. In that post I wrote, “I continue to believe that the major risk is in the bond market and also holding too much cash. The value trap is in sectors that offer no growth and high dividends. Utilities and REITs are two areas that I’m avoiding.”

Those two sectors have trailed other sectors. This trend has recently accelerated for the Utilities Sector SPDR Fund (XLU), which is down -8.19% in the last month and down -4.59% year to date. The Vanguard REIT Index Fund ETF (VNQ) is down -5.27 YTD. In only the first two weeks, the S&P 500 (SPY) is already up 4.14%. The year has started out with a clear warning to investors chasing higher yields – AVOID INTEREST RATE SENSITIVE ASSETS. These investments could begin to look more attractive if the sell-off continues.

I hope that I can write again a year from now about how Gundlach and Gross were wrong and Buffett was right on the money. At some point, there will be a pullback, but this drop might be the buying opportunity for those investors that missed the bull market because they listened to Gundlach and Gross in the first place.

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