The third quarter of the year ended with a bang! The Dow Jones Industrial Average closed near the low of a 2,000-point correction. After fighting through the “stop and go” economic effects of the pandemic, the specter of our border crisis, the Afghanistan defeat, and a continuing crime rate increase, the market came face-to-face with socialism. The stark realism of the
Democrat’s agenda came to light so that Americans could evaluate the proposals and the tax increases that go hand in hand with them. Investors balked at the attempt to “push through” the legislation and as we close the quarter, the outcome of the battle in Washington is still unknown.
The one thing that is certain is that risk has increased for almost every investment. The Democrat’s agenda will be a significant burden for the economy as a whole and will serve to reduce income, profits, and gains received from virtually everything. As you know, our process at Cadinha & Co. is to adjust portfolio risk to match the investment environment. The bond and stock markets are now like busses careening down a narrow cliff road, carrying much increased risk. Accordingly, we have adjusted the risk factors in client portfolios.
We have decreased exposure to bonds as stubborn inflation continues. Seemingly, bond risk premiums should increase to accommodate the borrowing that will be necessary with any new social legislation.
The dollar continues strong as a relative benchmark reflecting the problems of other nations that are not enduring as well as we seem to be. Accordingly, commodity and foreign exposure have also been minimized in portfolios.
There are important factors to ponder before selecting new investments going forward. Will the proposed tax surcharge on foreign earnings be adopted? What will the corporate tax rate be? What green regulations or taxes will be adopted and levied against natural resource companies? Will there be price controls levied against pharmaceuticals and medical equipment manufacturers? This is a simple list of considerations that should be made prior to adding more investments to your portfolio. We will keep a close watch over the many evolving legislated and mandated issues.
This current correction may prove to be a buying opportunity if the socialist movement is defeated, or at least minimized. Our Republic is a very unique form of democracy capable of correcting, adjusting, and succeeding on its own. We’re not ready to write it off, but are waiting to see the results of the battle in Washington. If the Biden spending and tax plan is somehow adopted in full, the government could be quickly scraping money from the bottom of the barrel. As Margaret Thatcher warned decades ago, “the problem with socialism is you quickly run out of other people’s money to spend.” Gridlock, anyone?