3 Biggest Macro Risks And How To Profit From Them

David Goodboy's picture

Wednesday, August 8, 2018 - 2:30pm

by David Goodboy

There are very few certainties in the stock market. One that everyone can agree upon is that today’s bull market will end. It may end with a whimper, or it may end with an earth-shaking, saber-rattling crash of epic proportions. No one knows for sure!


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The current bull market is nearing its 10-year anniversary. There has not been a 20% decline in the S&P 500 since the great financial crisis of 2007-2008.

There is no telling how long the bull run will last. It is now the second most extended U.S. bull market of all time, second only to the nearly 13 years run from October 1987 to March 2000.

Risk equals reward in the financial markets -- the higher the risk, the higher the reward. There is no such thing as riskless profits!

Right now, in the stock markets, risk abounds on many levels. Single company risk, sector risk, and macro risk are just a few of the primary dangers in today’s market.

Only one of these three primary risk factors, macro-risk, can send the entire stock market crashing down. Macro risk is political and economic factors that affect the stock market.

The greatest macro risks right now are extreme populism, trade conflicts, and currencies.

Each of these macro risks can end the bull market. All three together can send the world spiraling into a global economic depression.

The good news is that there are ways to profit from each of these risks.

In fact, the higher the risk, the greater the potential profit! Let’s take a closer look at each of the significant macro risks and how to profit from them.

1. Extreme Populism
The world is going through a stage of radical populism. Populism is the belief that the world is divided into two camps of the elite and the commoners. Although their worldview could not be more opposed, both Donald Trump and French President Emmanuel Macron are populist leaders. Other global leaders riding the populism wave are Mexico’s Andres Manuel Lopez Obrador and the government of Italy. Another excellent example of populism is Britain’s Brexit.

Any anti-establishment movement can be viewed as populism. While at first glance, populism may seem like a good thing. What could be wrong with “power to the people” and blaming the wealthy for societal woes? Well, nothing is inherently wrong within moderate doses.

The issue comes when it becomes extreme. Financial programs, tax cuts, and the overall lack of balanced financial decision making can wreck long-term havoc on the economy.

Investing in precious metals such as gold and silver is one way to hedge against the threat of populism. It is best to avoid debt-heavy companies and those who cater to the aspirational class in times of extreme populism. Also, consumer staples and other inflation-resistant sectors can make sense during these periods.

An outside-the-box investment during times of rising populism would be social media stocks like Facebook (Nasdaq: FB) and Twitter (Nasdaq: TWTR). This is because populism fuels greater connections and interactions facilitated via social media.

2. Trade Conflicts
Trade wars are not suitable for the stock market. Nearly every day we hear of a new trade threat from the Trump administration. Trump recently upped the ante by stating 25% levies will be instituted on $200 billion of Chinese products. All the escalating threats have accomplished is having China respond in kind by issuing their tariffs on U.S. imports. It is a never-ending cycle of one-upmanship that can only end badly for both economic powers.

In the worst case scenario with tariff’s pushing 30% on both sides, UBS has estimated a 20% plunge in Asian, European, and U.S. stock markets. One would want to avoid companies that are part of the global supply chain as they would likely take the brunt of the blow. Also, the trade war would probably slow down the global economy which will weigh on petroleum, travel, and oil concerns.

ETFs focused on India and other emerging markets that are not as reliant on imports may make sense as a way to outfox the pending trade war.

Specifically, I like the Rondo New World Fund (RNWOX) as it focuses on companies with net cash which can best withstand political and economic volatility.

3. Currency Dislocation
The widely divergent monetary policy has thrown some currency markets into disarray. The yuan has recently plunged 7% against the greenback, Brazil’s real has given back 11%, and Turkey’s currency is lower by an astounding 25% so far in 2018.

High debt levels in emerging markets fueled by bonds sold to U.S. investors exasperate an already dire situation.

Believe it or not, Chinese firms like internet giant Baidu (Nasdaq: BIDU) may make significant investments to fight the currency threat. The reason being is that the company boasts more cash than debt and will continue to grow thanks to China’s expanding middle-class despite the pending tariffs.

Risks To Consider: No one knows the future. The above scenarios may or may not play out to an extreme level. Politics and economics are always in flux. The best investors can anticipate changes and position themselves for profits.

Action To Take: Consider preparing your portfolio for the potential macro threats above.

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David Goodboy does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.