August And September Are Great Months For Well-Diversified Portfolios

Summary

August was fairly painless for stock investors, down only 1.81% in the S&P 500 and -1.72% in the Dow Industrials, but with proper diversification, the month was positive for balanced portfolios.

Why did gold, silver, and bonds do so well in August and all year? It's a fallout from the trade war and the global "race to the bottom" in interest rates, in a currency war on two fronts.

Tax receipts in fiscal year 2019 (ending this month) are up 3% over FY-2018, and tax receipts are slated to rise by another 6% in fiscal year 2020. It's the spending that's the problem.

After a positive final week, August was fairly painless for stock investors, down only 1.81% in the S&P 500 and -1.72% in the Dow Industrials, but with proper diversification, the month was positive for balanced portfolios. Bonds were up nearly 3% and precious metals soared, with gold up 7.1% and silver up 11.6% in August alone. Using a 60-40 stock-bond weighting, August turned out to be a wash - no gain, no loss - but if you were 50% stocks, 30% bonds, 10% gold, 10% silver, your portfolio gained +1.75% in August.

Randall W. Forsyth, writing in the September 2, 2019, edition of Barron's, calculated that a traditional 60% stock, 40% bond portfolio using the SPDR S&P 500 Trust ETF (SPY) for stocks and the iShares Core U.S. Aggregate Bond ETF (AGG) for bonds, year to date, "would show a sparkling return of 14.45%, consisting of 18.16% from the equity side and 8.89% from the debt portion." But there was a vicious stock market correction from September to December last year, when bonds outperformed stocks, so if you go back a full year, the 60/40 portfolio returned +5.53%, with the bond side delivering +10.26% vs. only 2.37% from the stock side, so proper portfolio diversification works in both bull and bear markets.

You wouldn't know it from the media, but it's been a great year for stocks, bonds, and precious metals:

Why did gold, silver, and bonds do so well in August and all year? It's a fallout from the trade war and the global "race to the bottom" in interest rates, in a currency war on two fronts. In the trade war between the U.S. and China, the Sun Tzu disciples in Beijing devalued their own currency to gain trade advantages or to offset the cost of U.S. tariffs. On the other currency front, Europe and Japan have tacked on negative interest rates to their sovereign debt, forcing investors to rush to the U.S., which was also lowering rates.

The silent winners in this bizarre race to the bottom in currency values are gold and silver, the long-term currency components of the world's first coins, dating back to the 7th century BC. Electrum was a gold-silver alloy that remained common in the earliest coins. The gold standard lasted until the 1930s, while America retained a gold exchange standard until August 1971, when President Nixon refused to honor the $35 per ounce exchange rate for gold to the dollar, after which the dollar "floated" and then sank in value.

In the 48 years since Nixon closed the gold window, the U.S. dollar has lost 97.7% of its value to gold. Most other currencies have fared worse than that, so gold is that part of a portfolio I call "super-cash." It does not compete with stocks. It competes with bonds or cash. In a world of low interest rates, gold can soar, and gold now enters its historically best time of year - September through February - when gold jewelry is fabricated for a series of holidays, starting in India, then Christmas, on to China's New Year.

Trump's Tax Cut Boosted Tax Receipts - The Deficit Comes from a Spending Explosion!

President Trump campaigned on cutting spending and cutting taxes. He cut taxes, but he forgot about the spending cuts. Some are blaming the current deficits on his tax cuts, but that's not fair. As in previous tax cuts, lower tax rates spurred growth and higher tax collections. Tax receipts in fiscal year 2019 (ending this month) are up 3% over FY-2018, and tax receipts are slated to rise by another 6% in fiscal year 2020.

It's the spending, stupid. That's the problem. Last week, the Congressional Budget Office (CBO) released its projection of the federal deficit over the next year and 10 years, projecting a deficit of $960 billion this year (FY-2019) and an average $1.2 trillion annual deficits from 2020 to 2029 (chart below).

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Treasury debt held by the public is projected to grow by 77%, from $16.6 trillion this year to $29.3 trillion in 2029. This crowds out funds available to invest in stocks or businesses or consumer spending.

The problem is not tax receipts but spending. Both political parties have given up on spending restraints. They have both agreed to give up on any "debt ceiling" until 2021, after the next election. On March 21, President Trump released his budget for fiscal year 2021, which called for spending of a record $4.746 trillion, while bringing in only $3.645 trillion from all sources. While that represents a 6% increase from FY 2019 revenues, it represents a $1.1 trillion deficit for the fiscal year starting October 1, 2019.

This does not even bring into the picture any of the Democratic candidates' Fantasy Island plans for a post-2020 revolutionary remaking of the American economy through Medicare for All, free college, debt forgiveness, ad infinitum. Neither party is serious about cutting spending or asking for any sacrifices.

In this day of super-low interest rates, imagine what a $30 trillion federal debt would cost if the average interest rate went up to just 4% or 5% in five or 10 years. We need candidates who talk restraint, not pipe dreams. Unfortunately, anyone talking common sense or practicality seems to get booed off the stage.

Practically speaking, the Treasury should be selling all the 10-year to 30-year bonds it can sell at sub-2% rates now, rather than selling large volumes of short-term bills, which are the most exposed to changes in interest rates. There is no way our nation can afford to pay 5% or more on $30+ trillion in public debt.

Disclosure: *Navellier may hold securities in one or more investment strategies offered to its clients.

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Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.