Market Overview

Worried About Political Uncertainty? Check These Traditional Safety Investments

Worried About Political Uncertainty? Check These Traditional Safety Investments

Regardless of your political or social leanings, 2016 was a year of unexpected developments in the world of geopolitics. The decision on the part of British voters to leave the European Union as well as the election victory of Donald Trump were two high-impact instances of the unanticipated running roughshod over analyst predictions.

However, other dramatic developments throughout the world, such as the impeachment of South Korean President Park Geun-hye, the rise of nationalist, protectionist ideology in Europe, America, and Asia, as well as the revelation of Russia’s involvement in influencing America’s presidential election, all fostered a contentious world stage through much of the year.

2017 has proceeded with little positive change in the geopolitical forecast. Anxieties have mounted in the Pacific due to increased military action from both North Korea and the United States. Strife has pervaded the Middle Eastern theater due to the ongoing Syrian conflict, in addition to the attempt by military forces to retake ISIS-controlled Mosul, Afghanistan. This has in turn added to the crisis-level outflow of refugees from the region throughout Eurasia at a time when immigrants are increasingly treated with suspicion and outright derision.

There is also President Trump’s use of the largest non-nuclear explosive device in a surprise bombing in Syria early in April. Though the show of force delighted some, it also left many wondering whether he had a clear foreign policy to guide the country through the seemingly dark times ahead.

While all of this might have you feeling understandably anxious, you may take some solace in the fact that the stock market has largely been able to brush off ALL of these developments without flinching. In fact, the DOW and S&P, as well as many other indices and individual equities, continue to find record highs. While many analysts have long called a top to the bull market, and many others have claimed the market is overvalued, there has yet to be a sustained major correction.

If that doesn’t allay your concerns, and you have some investment assets you are thinking about moving into alternative instruments or more defensive securities, there are a few avenues that investors have historically used in times of uncertainty that you may want to consider.

If you are worried enough to shift your portfolio, but not enough to take your money completely out of the still growing the equities market, consider the consumer staples sector. Following the 2008 financial crisis, stocks like Procter & Gamble (NYSE: PG) and Colgate-Palmolive (NYSE: CL) showed steady resilience in reclaiming much of their valuation in the months following an initial correction. Compared to the rest of the equities market, this sector remains defensive.

Similarly, stocks with consistent dividend yields have also served investors as a safety measure by padding their portfolios with reliable income. Telecom giants like AT&T Inc. (NYSE: T) and Verizon Communications Inc. (NYSE: VZ), which both offer a nearly 5% annual dividend yield (at the time of this writing). Utilities like Brookfield Renewable Partners LP (NYSE: BEP) and Just Energy Group Inc (NYSE: JE), which currently have a yield over 6%, have traditionally been common sectors for dividend payouts. However, dividend returns rely on a company’s sustained revenue and growth, and high dividend offerings can act as a value trap if a company does not have fundamental strength to continue distributions. These concerns are especially relevant if lean times are ahead.

Providing greater insurance against risk, government-backed investments like Treasury notes and bonds have served as the fallback for long-term investors in times of downturn or slow growth. Government debt has the benefit of reliable semi-annual returns in interest payments and can sometimes retain high value if they were purchased in a higher interest rate environment, although their resale value drops as interest rates rise.

Due to a prolonged trend of economic deflation that has still not abated, government bonds have not regained much of their value following the 2008 crisis. Prior to the crash, the rate on 30-year treasury note yields were steadily in the range of 4.2%. Compare that to the most recent auction yields of 30-year notes in April of 2017 where rates have failed to break 3%. This is mainly due to a surplus of notes, which have been unattractive investments as the market has experienced steady recovery since 2010. While the low price is a boon for value-seekers, the fact that that yields have remained low despite recent growth trends have diminished the value and weakened the defensive viability of debt securities.

Finally, money market accounts may be your best option in finding recourse from high risk and unexpected global financial events. MMA’s are FDIC-backed deposit accounts that offer higher interest rate returns than traditional savings accounts. While your investments are still subject to dollar value trends, as with treasury bonds, there is less risk of opportunity loss if rates begin to rise.

While money market funds are often grouped together with MMA’s as similar safety investment instruments, their actual risk tolerance is much lower. Money market funds are privately managed mutual funds and are therefore not guaranteed under the FDIC. And while money market funds invest in short-term, high-quality, liquid corporate debt securities, they are still at risk if the bond issuers become suddenly insolvent as occurred in 2008.


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