Correction

Stock markets at all time highs!

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.

https://www.marketwatch.com/story/dow-set-for-best-week-since-july-as-stock-futures-imply-deeper-push-into-record-territory-2018-09-21?siteid=bigcharts&dist=bigcharts. 

The Asian stock market downturn is probably not permanent.

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

Stock Market Storm Ahead? Goldman Sach’s Indicator Is Blinking Red

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

Focus on the long term

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.

Read more.

Thirty years ago

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.

 

Gone and mostly forgotten.

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. 

60% of a bag full of slow

The stock markets of the world appear to be impervious to every current geopolitical event, including the threat of nuclear terrorism and serial hurricanes, while a growing number of writers are shrieking that the end of the financial world is nigh. (Read the latest apocalyptic broadcast here.) Hmmm. I have my doubts, but there’s a lot of smoke in the air. Conditions being what they are, last week I moved 5% in many clients’ accounts from stocks to short term bonds. That’s very unusual for me. I’ve learned the hard way that even the best-calculated predictive indicators are easily undone by Fed easing. So usually nowadays we simply stay invested. The long-term force is with equities.

However, bonds aren’t deeply attractive right now either, except as a place of relative safety. Some bonds, especially longer-term issues, are overvalued like stocks. And the perception that the Fed Will Make All Things Good is strongly at work in bond-world as well. Here’s an interesting article which details the almost nonexistent difference in three year performance between top-end bond funds. Some of our conservative clients have portfolios which are 60% bonds. Those bonds aren’t producing much. Granted, bonds are traditionally holistically safer than equities, but in terms of gains, they historically don’t do much.

Right now, because of valuations, we temporarily have clients with 60% invested in boring. My hope is to eventually get them into equity bargains, and make some real long term gains. Patience pays.

I think I’ve figured this out.

The more missiles North Korea shoots over Japan without blowing anything up, the more investors think the Federal Reserve is likely to be cautious about raising rates, and thus the more they invest in stock markets.

Absurd but there’s a logic to it.

As someone said earlier this morning as a joke, perhaps the North Korean dictator has a brokerage account or a hedge fund, and he’s doing his part to boost profits. We are only ten or twenty missiles away from Dow 30,000.

We should also consider the consequences if he’s not joking, merely insane. Read some reality here.

Risk Happens Fast

As last night’s 8.2 magnitude earthquake in Mexico illustrates, risk happens fast. We are now conditioned to three beliefs: things will continue as they are today indefinitely, the Federal Reserve will always save us, and we’ll be able to dodge out of the way.

Nine years ago today, that wasn’t the case. One of the largest investment banks, Lehman Brothers, was allowed to go bankrupt and default on its bonds. The stock market fell 25% in one month. The decision to let Lehman Brothers sink beneath the waves was a political choice, based on traditional attitudes towards free capital markets, and one lesson we all learned was that some corporations are “too big to fail.” The global political aftermath of the Lehman Brothers debacle was so painful that it’s doubtful it would happen again.

But the choice to rescue any and all carries risks as well, doesn’t it? We risk rescuing businesses which OUGHT TO FAIL and we reduce the efficiency and effectiveness of the global economy as a result.

It’s worth remembering also that almost nobody was able to dodge out of the way of the Lehman default. Our asset allocations going into the chaos determined our overall performance. As Mark Hulbert and Doug Kass have written, risk happens fast, too fast to dodge out of the way. Diversification has a price, but it also has a benefit.

Read more here.

We send our prayers to those damaged by the earthquake and by Hurricanes Harvey and Irma. It’s a busy world out there.