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There are two key uncertainties facing investors now:

  1. Where are we in the business cycle? U.S. companies in their quarterly results revealed their largest annual profit decline since the recession, suggesting that the economy and stocks are moving toward the late-cycle phase. Productivity decline further crimps US economy’s long term prospects.
  2. What will the presidential elections do to the markets? It is widely believed that volatility will pick up ahead of the U.S. elections. Even though Democratic presidential nominee Hillary Clinton appears to be leading, Donald Trump, the Republican candidate, could cause even more volatile swings.

1. Corporate Earnings Review

Corporate America’s profits dropped to $2.1 trillion in the third quarter, or down 1.1% from the second quarter, and fell 4.7% year-over-year, the largest annual decline since the second quarter of 2009. We believe that weak profits could crimp business investment and adversely impact stock prices. This could also mean that we may entering the late cycle phase of the business cycle. In past cycles, the late-cycle phases had an average duration of about a year with muted overall stock market performance. Economic data last week further dampened the outlook with worker productivity declining for third quarter in a row. Productivity is a key ingredient in determining future growth in wages, prices and overall economic output. Stagnant productivity and rising labor costs also could continue to squeeze corporate profits for the foreseeable future.

2. Presidential Elections

While there are no sureties on who is going to win the election, a surprise win by Trump and his unpredictable policy proposals could shake financial markets. On the other hand, the prospect of Hillary Clinton winning paving the way for the Democrats to regain full control of Congress could also be unnerving. Furthermore, post election year stock performance have always under-performed election year and pre-election year returns.

Future Wealth Recommendation

These are testing times for investors with the market at all time highs. Being prepared for a market correction is critical at this time, in our view.  At Future Wealth, we believe defensive sectors, dividend paying stocks and low volatility ETFs, all with downside protection,  are the key to riding out the next 6-12 months.