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What’s happening, and what to do about it
This is not supposed to happen at this time of year…at least that’s what they told you on TV. Earnings were great, the economy is great, the Fed is in control, all that tariff nonsense will blow over, and Santa is coming…what could go wrong?
And then, things started to go wrong. And then this and that occurred, and all of sudden, wham, your stock portfolio is down 10% or 15%, or even 20%. What is causing this and just as importantly, what comes next and how do you address it? I am happy to report that in order to answer those key questions for investors, financial advisors and those inheriting wealth in the coming years, we can simply look back at many of the issues discussed in this column during 2018.
You see, if this is truly the start of a stock bear market, it will be the one whose red carpet on-ramp is by far the longest I have seen in my 32-year investment career. After all, here is a sampling of warning signs thrown at us over just the past year (in no particular order):
- Bitcoin-mania ensued, a sign of outright speculation that rivaled the dot-com bubble in its audacity. And just to hammer the point home, marijuana stocks soared after that. Each of these industries have merit, but their associated stock prices got way, way ahead of their skis.
- The S&P 500 was the toast of the investment world, outperforming virtually everything for a few years, and convincing investors that it was THE way to invest.
- Low-cost investing replaced high-effort investment research, at least in many investors’ minds. See “Robo Advisor” and “Low-Cost ETF” for more on that.
- One after another, signs of overvaluation flashed in charts of stock prices. Importantly, there were plenty of false alarms, after which the market just kept on chugging. That bred even more overconfidence.
- The Federal Reserve “saved” the economy from a recession in early 2016 by pumping yet more “liquidity” into the system…which merely kicked the can down the road…until now.
- Short-term interest rates awoke from a 9-year slumber, and finally offered a decent alternative to stock investing.
- Dividend stocks’ returns were dramatically outdistanced by low-yield and no-yield stocks. As I pointed out earlier this year, there have been only three times in the past 20 years in which the highest-yielding stocks in the S&P 500 (“top quartile”) were dominated by the lowest yielders (“bottom quartile”). Those years were 1999, 2007 and 2017. In the first two cases, a bear market for stocks began in the following year. And while the S&P 500 and Nasdaq waited until the bottom of the ninth inning this year to repeat that feat, well, here we are again.
- Activities in Washington D.C. (and Russia) started to remind some folks of the Watergate era, and it finally appears as if the stock market cares a little about the potential disruption that awaits the political scene in 2019.
- So-called “60/40” portfolios that allocate 60% of their money to stocks and 40% to bonds came to be considered by many as the ideal way to invest. But the historical evidence in this area is heavily tilted toward when times are good for the stock market.
- Recession warnings started to appear with some frequency…and were ignored by Wall Street pundits. The iconic such indicator is the difference in yield between the 10-year and 2-year U.S. Treasury securities. I started to report on this in 2017, when the spread fell below 1.00%.
- The high yield bond market is cracking. Translation: the market is very worried about the fate of lesser-quality companies that have issued a lot of debt. In good times, they call these high yield bonds. Going forward, they will likely return to their former title “junk bonds.”
- Emerging Market stocks started to cave in…first. These stock markets, mostly in Latin America, Southeast Asia and Eastern Europe, are often the “canary in a coal mine” for the more developed markets. They cracked back in late January and fell more than 20% from that point until early October, while the S&P 500 actually rose during that period. Then, the S&P 500 followed suit. It was at that point that folks started to notice, then panic. And that’s where we find ourselves today.
- Investors en masse became very complacent and overconfident.
- In baseball, there is an expression about teams being successful when they have very fast runners: speed kills. In investing, greed kills…wealth. There has been an awful lot of “FOMO” (fear of missing out), and this as much as any of the above tangible indicators was the tip-off for my team and me that we were heading toward some sort of reckoning.
Now, there is still time for the “it was just a bad dream” scenario to kick in. But it is getting late for that, based on the indicators I track most closely. I will cover those as this whole stock bear market thing develops, but for now, there are some very basic tenets of surviving and even thriving in bear markets that I have written about here and will remind you of again (since there has been no better time for that in the past decade).
- Truly seek to understand what makes you tick as an investor, and then invest to those strong preferences.
- Forget what other people say if it is not part-and-parcel of #1 above.
- Understand that the way markets act in 2018 and beyond is VERY different from how they have behaved in the past. In particular, the “players” like high-frequency traders, hedge fund, algorithmic investors, indexing and the herd mentality of investors all combine to force us to reconsider how we attack our long-term objectives and defend against major losses in value.
I am a hedged investor, and have been since the late 1990s, when the pending Dot-Com Bubble freaked me out enough that I started to devote my career to trying to rise above the feast-or-famine process that so much of Wall Street forces investors into. 20 years later, it is a pleasure to be able to share some of my insights with you as the winds change.
The flexible and adaptive investor can not only survive bear markets, but potentially thrive in them. At the very least, they can stay on course until the next, inevitable bull market occurs. I surely do not have the ability to predict the future, but I do aim to provide you with some knowledge that busts common investment myths, separates hype from reality, and keeps you in your seat as the air gets increasingly turbulent around your wealth. I invite you to visit my past articles on Forbes.com, as I believe I have prepped my readers pretty well for what is finally happening in the global investment markets.
For research and insight on these issues and more, click HERE.
Comments provided are informational only, not individual investment advice or recommendations. Sungarden provides Advisory Services through Dynamic Wealth Advisors.
December 23, 2018 at 09:15AM
Forbes – Entrepreneurs