Will Swamp Monsters Kill the Rally?
I don’t work for the government and never have.
Thankfully my income was unaffected by the D.C. standoff.
The most affected were the roughly 800,000 federal government employees who have gone without paychecks. The New York Times estimated the average government employee has (temporarily) lost $5,000 in wages.
But for investors, there may be an even bigger impact.
Nine Departments Investors Rely on Were Closed!
These nine departments — including the Department of Commerce, Bureau of Economic Analysis and Department of Labor — collect key information about housing, trade, business, inflation, energy and consumer spending.
None of the data has been available recently because of the shutdown.
That data are used by investors, economists and policymakers.
When these folks don’t have these data they’re flying blind.
And that could directly impact your wealth.
Data Dependent? Ha!
When the federal government shuts down, reports on retail sales, housing starts, durable goods, gross domestic product and personal income and spending are not available to the Federal Reserve Open Market Committee. Including when they meet on Jan. 29–30. The FOMC needs those data for policy decisions.
I’m not a big fan of the Federal Reserve, but to expect them to make decisions without the most current data is asking for trouble.
And if the shutdown resumes in two and a half weeks, the Fed will have even less hard data at its disposal.
Fed Chairman Jerome Powell has emphasized how “data dependent” the Federal Reserve is. Now they are as blind as Mr. Magoo and it’s all the more likely the Fed will screw things up.
I’ve been pretty optimistic about the economy and the stock market this year. But given the damage done already by the shutdown, I won’t be surprised if we see another 4–6% correction in the near future.
That doesn’t mean ditch your stocks and run for the hills. But it does mean that you need a defensive strategy. Here are the best ones.
The Best Ways to Protect Your Wealth Right Now
To protect your portfolio in volatile times like these consider:
Lowering Your Stock Allocation. Most investors can handle an 8%, 10%, 12% or even 15% decline in the value of their portfolio, but there is a panic point that makes investors cry “uncle” and sell everything.
If you are 100% invested in stocks right now and nervous about it, consider lowering your stock allocation. That way you can sleep well at night.
Predetermined Sell Points. Emotions are an investor’s worst enemy because they cloud your judgement. I recommend you use a disciplined sell strategy, such as placing trailing stop loss orders to help protect your downside.
A stop loss is like an auto insurance deductible. A $1,000 deductible on a $30,000 car means that you have to absorb the first $1,000 loss but nothing beyond that. The same is true of a stop loss, and 20% is a good place to start.
Taking out “Portfolio Insurance.” There are investments designed to increase in value as the stock market falls, such as put options and inverse ETFs. Inverse ETFs are designed to increase in value when the stock market is falling. Of course, inverse ETFs can and do lose money when the stock market is moving higher.
Loading up on Low Beta Stocks. The No. 1 best way to minimize your risk in the event of a market decline is by investing in low-volatility, high-yield dividend stocks. A stock with a beta of 0.8% will only capture 80% of the S&P 500’s upside but it will also lose 20% less when the stock market is falling. At the same time, a stream of dividends adds current income, offering another valuable layer of protection.
And those are exactly the types of stocks I recommend in my exclusive Infinite Income service.
It could be your best defense against a government shutdown-induced market decline.
Here’s to growing your wealth,
Chief Income Expert, Mike Burnick’s Wealth Watch
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