2017 has been a surprise in many ways—both politically and financially.
At this time a year ago in 2016, Hillary Clinton was a “shoe-in”, Donald Trump was 10 points down in the polls and fighting off the Billy Bush scandal, and market pundits were predicting a bull market after Hillary’s crowning.
If, in the outside chance that Donald Trump scored a victory, (presumably because Hillary ended up having a heart attack or some other health problem) the market would crash by fifteen to twenty percent.
The dollar was strong among currencies and the Fed was toying with raising rates aggressively.
Donald Trump was elected president. A bull market ensued. And Mr. Trump got his wish by January of 2017: a weaker dollar relative to other currencies. Does the currency thing matter? Oh yeah.
One of the biggest economic factors driving markets in 2017 is the value of the dollar relative to other currencies.
Why is the relative value of the U.S. dollar a big deal for the stock market?
In a global economy, the relative strength of your currency will determine how many widgets you sell overseas. How many widgets you sell overseas can determine your net earnings as a company.
What one thing drives the direction of the stock market? Earnings. When you want a clue to where the market is headed, think earnings. Earnings reports drive the prices of stocks in today’s world. When a company beats projected earnings, the stock generally rises. When the company “misses” and falls short of projections, you can expect that stock to fall.
KEY POINT: 2016 was the year of a dollar that was “too strong”. It hurt sales and earnings of large blue chips. 2017 is the year of the weaker dollar—which has pushed up the S & P.
The IQ Wealth investment strategy is built to handle the waves up currency fluctuation in the short run, in exchange for the compounding and growth of dividends from profitable, quality companies in the long run.
So here’s a Quick Recap:
• In 2016 we had a Strong Dollar worldwide, which at first glance sounds like what you would want. We all think the dollar should be strong. But the dollar can be too strong in relative terms. U.S. blue chip corporations that make up the Dow and S & P 500 sell their goods all over the world, not just in the U.S. Therefore, when the dollar is “too strong” overseas, our products look too expensive to those buyers. One of two things has to happen: A) Consumers tend to reject the high priced product, lowering the company’s sales. B) The company cuts the price and lowers its profit. Either way, the earnings of the U.S. corp go down. Lower earnings = lower stock price.
• In 2017 The Dollar has drifted lower—The dollar is still strong domestically, therefore your ability to buy things is unchanged here in the states. But a weaker dollar overseas in 2017 has been an advantage to our companies here—it has made our goods and services cheaper to the end buyer overseas, and therefore helped U.S. companies sell more goods, resulting in more profit and better earnings—and earnings drive stock prices!
• Another difference between 2016 and 2017 has been lower bond rates. Last year, the 10 year treasury—the most important benchmark for bonds in the nation since mortgage rates are closely tied to it– rose to 2.7%. This year, in 2017 interest rates on the ten year treasury fell back into the low 2’s once again. Interest rates hit 2% even and have now drifted back into the 2.3 percent range.
• Low bond rates help corporations who issue bonds. When they can borrow cheaper, their expenses are lower. Lower expenses can mean higher net earnings. And …earnings drive stock prices.
• In summary, 2016 was marked by a bit more fear and a too-strong dollar that hurt earnings of many blue chips. This caused some fear in the markets and cause investors to run to dividend payers and think more defensively. 2016 was the year of the value stock, 2017 the growth stock.
So how is that all translating for The IQ Wealth Black Diamond Dividend and Blue Diamond Income and Growth Portfolios? Let’s have Steve review that, right now…
…Because demand ultimately drives share price, our focus with both portfolios is to select stocks and ETFs that from our analysis, from consensus analysis, and of course in our opinion, are in the pathway of demand. We may own a company here or there that has a bad quarter due to unexpected news or hurricanes, but in the long run, the companies we keep in the portfolio have strong market share and a strong business model. The may take a hit for a while, but their growing earnings will bring them back. And as we’ve repeated today, earnings drive stock prices.
At IQ Wealth, we think its time to think both profit and protection, not just one or the other. With our two Diamond portfolios, we have made course adjustments which we think prepare us for:
• A) A stiff market correction
• B) Further growth
We see it as our job to keep our clients in position to stay protected from the brunt of a reversal, while keeping ready capital available and liquid to gather bargains when the market falls. By the way, a bargain is not just a cheap price. We have a Watch List of high quality dividend growers that are first on our list—when the time comes.
We’ve talked on the show about the Black Diamond portfolio often—let’s review the new
Blue Diamond Income & Growth Portfolio
The Blue Diamond is anchored by Dividend Aristocrats, but is also dedicated to growth stocks.
It is a blended portfolio and is unique because the growth portion of the portfolio is focused on where we believe the global economy is headed.
Our philosophy is to always aim to skate ahead of the puck, and remain in the pathway of future investor demand.
Current Growth Positions:
Blending Dividend Growers with Select Growth Companies
Our objective with the Blue Diamond Income & Growth portfolio is to create a systematic and “picky” blend of dividend growth and consensus growth sectors.
The Blue Diamond consists of ETFs (no individual stocks) that combine our commitment and dedication to dividend growers (Dividend Champions and Dividend Aristocrats) along with top-tier ETFs from the following sectors:
• North American Tech Software Companies (Nvidia, etc)
• Emerging Market Internet & E-commerce (Alibaba, etc)
• U.S. Aerospace & Defense stocks (Boeing, Northrup, etc)
• U.S. Semi-Conductor and Chip Makers (Micron Technologies, Cree, ON, etc)
• Healthcare / Pharma / Biotech / Consumer Cyclical (Biogen, Amgen, Visa, Pfizer
Steve Jurich is the founder of IQ Wealth Management, and a contributor to Kiplinger and Investopedia. He is the host of the daily radio program, Mastering Money, on Money Radio in Phoenix, Arizona. Contact him at (480)902-3333