This study suggests that rates could go higher. That’s tough on real estate, hard on bonds and perhaps, short term, tough on stock markets as well. To put it in context, we’ve had historically absurd low interest rates for years now. To quote this well-written essay: “Bottom Line: Incoming data continues to support the Fed’s basic forecast that rates need to climb higher. I think the data increasingly supports the case that rates need to move in a restrictive zone before the Fed can breathe easier, but much depends on the evolution of the inflation data.” https://blogs.uoregon.edu/timduyfedwatch/2018/10/07/jobs-report-clears-path-for-the-fed/
As the accompanying article by Mark Hulburt points out, the emotional consequences of downside losses in a bear stock market are often greater than investors predict. As a result, these investors are usually reluctant to “buy cheap’ in the midst of a chaotic downturn. An even greater motivation is that bear market losses are..well, losses! Nobody enjoys that. With stock markets currently at all time highs, it’s time to be extra careful, even though we can’t really predict when bad news might strike. We’re already allocated with a potential bear market in mind. But when a downturn DOES occur, we won’t be able to predict in what market segments losses will be greatest. More on that later. https://www.marketwatch.com/story/now-is-not-the-time-for-stock-investors-to-ignore-the-next-bear-market-2018-10-01
“The end is nigh!” I’ve heard this lots over the years. So far it hasn’t been true. Although there have been hard times, we’ve always come back. Yes, there IS an awesome amount of debt out there. Yes, a downturn is inevitable, although the statistics aren’t saying that it’s imminent. And, yes, we’ll almost certainly recover from that downturn. So why do experts make such predictions? Because they are very successful at attracting attention. In other words, marketing. With all that in mind: caution, diversification, discipline, and courage.https://www.aol.com/article/finance/2018/09/23/expert-warns-next-economic-downturn-will-be-worse-than-the-great-depression/23539032/
This week we’ve seen US stock markets climb to new records, despite trade wars, political chaos, and overvaluation. The data says we’re at high risk, and the stock markets keep going up! The tactic of selling out and going to cash has been a miserable failure in the past. What has worked best has been the choice to simply keep our portfolios very diversified, allocate conservatively, and be patient.
Yes,Asian stock markets are being damaged by the nascent trade wars. At some point they are going to be bargains. My thought is that due to Asian growth and American confusion, the 21st Century is possibly going to be the Asian Century. That may happen with lots of volatility and angst. With that in mind, we’re already buying more, in small amounts and diversified. Our expectation in these high risk venues is to outperform the U.S.’s S&P 500 in the long run ten year time frame. https://www.bloomberg.com/news/articles/2018-09-12/asian-stocks-are-caught-in-the-longest-sell-off-in-16-years?cmpid=BBD091218_MKT&utm_medium=email&utm_source=newsletter&utm_term=180912&utm_campaign=markets
Famed Economist Robert Shiller Sees Upside In Overvalued, High Risk Market. What’s An Investment Advisor To Do?
Happy Friday! As the world is being battered by two great storms (Hurricane Florence in the Carolinas and Super Typhoon Mangkhut in South Asia), our own U.S. stock market is overvalued, high risk, and climbing ever higher! But Nobel laureate economist Robert Shiller, who has successfully predicted past market debacles, feels that the stock market could still go a lot higher! So we are maintaining a highly diversified, somewhat conservative allocation, but we are NOT “cashing out” of stock market mutual funds. Reality: nobody knows what will really happen. https://www.bloomberg.com/news/articles/2018-09-14/shiller-says-u-s-stocks-could-go-a-lot-higher-before-dropping
Goldman Sachs has released a report which warns of a potential stock market decline ahead. We don’t really know what will happen. Nevertheless I feel that it’s prudent to stay diversified and allocated to a relatively conservative spectrum of mutual funds. As the new Goldman Sachs report notes, “many investors are wondering how long the economic cycle and bull market can last, and what type of conditions could follow. The difficulty in answering these questions is that the current cycle has been difficult to pin down. It has been, and remains, a very unusual cycle, making historical comparisons less reliable.” https://www.zerohedge.com/news/2018-09-05/goldmans-bear-market-indicator-shows-crash-dead-ahead-asks-should-we-be-worried
I was reminded of that today when a client called up and asked what return he could expect on his investments. I said we really can’t predict, but a long term average of 7% has historically been both attractive and doable, with discipline. We really can’t say what the future will bring.
What does “discipline” mean? To some degree it means that we ignore the day to day noise and focus on long term realities.
Reality: Bitcoin is probably a bubble. Thus we should approach cautiously if at all.
Reality: The economy is profoundly leveraged, “in debt up to our eyeballs”. That always has negative consequences.
Reality: The financial markets are probably overvalued. A downturn in the future is probably inevitable. The downturn will probably be followed by an upturn, as day follows night.
Reality: history tells us that we really can’t guess. In the decade or longer time horizon, by buying low and avoiding bubbles, we will probably steer our investments towards attractive gains. In other words, in the long run, most of the above doesn’t matter. Stay the course. Stay diversified. Patience pays.
Thirty years ago this week I was beginning what was then a very novel business model: fee-only, no commissions. I was working at Christopher Weil, Inc, after a few years at E.F. Hutton. The consensus among the veterans was that fee-only could never work. Now it’s the industry standard, and I was present at the beginning.
Much to the chagrin of some of my managers, I had moved my clients’ accounts to safer positions because I thought the stock market was overvalued. As the Quotron…a primitive computer…kept posting lower and lower numbers, I looked over at the office manager. His face registered horror. We turned on a speaker from the floor of the New York Stock Exchange, where the trading was done with paper and voice, and we could hear a roar from the crowd. Everyone was trying to sell.
After that, I bought stock mutual funds for my clients and for myself at bargain prices. The market fully recovered within months. Our portfolios benefitted much more than any losses hurt us. Black Monday 1987 was the first time that awareness of overvaluation produced a big win for us.
Since then, calling out overvaluation has been much harder. In the 1990’s we were right but it took YEARS before the 2000 Tech wreck, and many clients became discouraged before it happened. The 2007/2008/2009 Financial Panic was different because recovery took a long, long time. Many clients were discouraged by that as well.
Now the financial markets are overvalued again, but the central banks have changed the game by stimulating. We don’t really know what will happen. Eventually I expect that a correction must occur, but it may or may not replicate the sheer terror of Black Monday 1987. Meanwhile, all we can do is pay attention and stay diversified. As my life illustrates, patience pays.
Ten years ago today, the S&P 500 U.S. stock market index hit its record high before falling about 57% in the Financial Panic of 2008. It recovered in March, 2013.
Before the meltdown, there were already major issues in the financial system which were larger and more dramatic than what we are facing today. So is such a meltdown imminent now? If so, I can’t see it. But valuations and debt levels are again high.
How soon we forget. Read more here.