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
Consider Putin’s efforts to rebuild the Russian empire from the standpoint of organized crime seeking to optimize itself financially. The amount of disinformation, hate-baiting, distraction, and violence is astonishing, but all that covers up an even more awsome level of mindful corruption. I believe that Putin intends to literally corrupt the entire western financial system for financial gain and political control. Is the Putin organization willing to destroy the financial underpinnings of the west? Probably only if it stands to gain financially. Thus our plan to keep investments simple and diversified seems appropriate. https://euobserver.com/justice/142726
My last entry on January 30th, 2018, suggested that US stock markets were potentially overvalued. Apparently others agreed with that assessment, because early in February, in the face of rising interest rates, American stock markets dropped (almost) 10%. At that point I was guessing…a perfect word for it…that the financial markets would continue to decline to more reasonable levels. However, I chose to do no trading because I wasn’t confident.
Good choice. This week, U.S. stock markets strongly reversed, producing one of the best weeks in years. I suppose that had I been courageous we could have bought the dip, but I was too conservative for that.
Meanwhile international markets fell more, and have recovered less.
With the prospect of rising interest rates in mind, I perceive that the possibility of a downturn more wrenching than what we have experienced is still quite possible. Where we were before somewhat vulnerable, we are now substantially more vulnerable. My guess is that this week’s recovery is driven by FOMO, Fear Of Missing Out, not from any rational expectation.
Meanwhile I’m watching the bond market, and interest rates finally seem to be stirring, moving up. That’s a real, genuine game changer, potentially negatively, for many reasons.
Bottom line: for the time being, I’m maintaining our current asset allocations. But I’m targeting potential bargains, and I’m watching the horizon. Something profound may be happening. Frankly probably not, because most warnings don’t actually materialize into anything real. But what if…? Read more here.
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.