The media is focused on Hurricane Florence and its path toward the Carolinas and Virginia. Being a category 4 hurricane with 130 mph sustained winds, over a million residents are subject to mandatory evacuation due to risk of life-threatening storm surge, dangerous winds, and flooding. Our government is warning residents to take protective measures. This week also marks the 10th anniversary of the Lehman Brothers collapse; yet in the financial industry, investors are often told to stay the course and ride out the storm. Can you suffer through another bear market like 2000 or 2008 when the S&P 500 fell over 50%?
Are You Watching the Weather Forecast?
Even after 2008, the majority of people in the investment business say financial hurricanes are not worth taking precautionary measures. Many financial advisors, bankers and stockbrokers collectively stick their heads into the sand and fail to do research on disaster prevention. The industry doesn’t want its clients to hear of the possibility that things can go very wrong even after Lehman Brothers and Bear Stearns went bankrupt. Unfortunately, the Great Recession did not serve as a wake-up call.
The Runnymede team doesn't agree in a one-size-fits-all, let everyone refuse to evacuate approach. Not everyone has the luxury and wherewithal to ride out severe financial storms. Retirees don't have the benefit of time to recover substantial losses. Therefore, we believe in protecting client assets to the best of our ability. We closely monitor the business cycle and use our proprietary multi-factor tracking system known as METV to gauge market risk. Our track record of protecting clients from major corrections reflects our diligence and focus preserving our clients' assets. Our founder Samson Wang protected clients before 1987's Black Monday and was featured in the New York Times article, What the Bears of Summer Sensed. In late 2007, our indicators also flashed warning signs. Here is a quote from our newsletter to clients: "Our first response was in the fourth quarter of 2007 and early January as we were steering our balanced and equity accounts into a more defensive position."
Peak Economy Means Rising Risks
Currently, the US economy is showing strong growth with few signs of weakness. 2nd quarter GDP growth was 4.1% and unemployment is below 4%. Tax reform has boosted corporate profits and so far tariffs haven't disrupted global trade. However, the economic expansion is running long in the tooth and one could argue that the economy can't get much better from here.
In the chart above, I have charted the Russell 3000 index with the inverse unemployment rate. This indicates we could be at peak employment. While it could fall to 3.5%, structurally it cannot fall much further from here. In past cycles, once the unemployment rate rose by about 0.5%, the stock market reacted sharply to the downside.
Risks will likely increase over the next 12 months so the Runnymede team will be monitoring closely in case we need to navigate our clients through choppy waters. What is your advisor doing to prepare for the storm? Will you evacuate or do nothing in the face of a storm?