As you know, former Fed Chair Alan Greenspan said, ‘Run for cover.’ But, where and how?
On Christmas Eve we called clients to say we know you are worried about your money, which is with good reason. From 9/20-12/24 stocks are off 20%, according to Yahoo Finance. Your account, however, is off .30 to 7.0% (depending on their specific risk tolerance). Headlines these days only add to fear. Discovering how much loss is acceptable AND designing the portfolio to perform within each investor’s loss parameters is the 1-2 punch that allows investors to see their money may not disappear (tested 2000-02 & 2008-09) when needed. Unlike most, we are ready for the good, the bad, and the unforeseen.
David Stockman, former Director of the Office of Management and Budget under President Ronald Reagan said in his January 2, 2019 message to subscribers, “Here’s the reality that obviously afflicts Main Street and haunts Wall Street like a Dickensian ghost. The 2008-09 financial crisis never really ended. It was only warehoused by the Fed amid a long run of free money. To wit, from late 2008 until just a few months ago, the cost of carrying on Wall Street was virtually zero.
This elongated rate bottom made for nothing less than the devil’s financial workshop. It signaled that any asset with a yield or any prospect of even mediocre appreciation could be optioned or carried at virtually no cost and little funding risk. That’s what happens when the world’s most important central bank has the money market pinned to the financial floorboards.
Also, this: Heedless, relentless, and – in the end – mindless speculation that drives drastic inflation of the price of virtually every asset class. It’s way too late to prevent the thundering crash lurking just around the bend. ‘ZIRP,’ ‘Operation Twist,’ ‘QE,’ and all that absurd ilk have done their damage.
The true danger, in fact, is not another 25, 50, or 75 basis points of cost in the money market. The danger is that financial asset prices have long been detached from reality.
And that ‘reality’ is a debt-ridden economy ill-equipped to generate any real, sustainable growth. Do not be surprised to witness a major re-pricing for all financial assets. And thousand-point intraday or day-to-day swings are part of that equation. Those can be frightening… for ‘buy and hold’ investors.
Desperate times call for… ‘common sense’ measures.”
It’s a New Year. It’s time for a new approach.
On Sunday market futures were pointing up. But on the first day of the year markets opened decisively in the red. While the S&P 500 finished off 6.2% last year, the S&P 500 Value Index, which selects the cheapest 385 stocks in the largest index based on earnings, sales, and book value dropped 11.3%, reports David Stockman.
2019 looks like we are set up for the velocity of volatility. As of the start of 2019, the S&P 500 trades at 1.9 times sales. To put that in perspective, the all-time high – as in the most expensive the S&P 500 has ever been in its entire history – was 2.2 times sales.
So, while 2018’s declines definitely took some of the speculative froth out of the market, it by no means reset the clock.
Meanwhile, the Fed continues to suck $60 billion of liquidity out of the market per month as it winds down its balance sheet. It’s generally understood and agreed that the Fed’s aggressive monetary policy was a major factor in inflating stock prices over the past decade. By lowering interest rates to zero and by dumping an extra $4 trillion into the financial system via bond purchases (a.k.a. quantitative easing), the Fed all but forced the market higher. This time is different.
Now, all of that is going into reverse. The Fed is letting the air out of the bubble. I’m not a doom and gloomer, and I don’t believe the market is destined to “go to zero.” But I can tell you I’m happy we’re running portfolios that have the ability to hedge.
Could the market rally in January? Sure! If you think back to the 2000 to 2002 bear market, stocks didn’t go straight down. There were plenty of months that saw the market shoot higher, even if the broader trend was down.
We may or may not get a repeat of that. Only time will tell. But again, I’m glad our clients are well hedged and better diversified than most. This New Year is the perfect opportunity for a new approach. In less than 2 minutes here’s my reason for increased diversification:
And here’s my quick explanation as to how our clients take advantage of genuine active management:
You worked hard for that money. Now it’s time for the money to work for you.
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