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
Here’s an insightful study by Oppenheimer concerning the differences between India and China as investment venues. While emerging markets represent some of the fastest growing economies in the world, they also contain a lot of political risk, currency risk, and financial opacity. Often we can’t clearly see what is really happening! That means we can’t always recognize true bargains, so we can’t make well-supported decisions. Nevertheless, over the long term, carefully-targeted emerging market investments have a real probabilty of doing quite well. With that in mind, our emerging market holdings are diversified, analysis-driven, cautious, and small, as well as placed with experienced managers.
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.
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.