This market is as difficult to invest in as I have ever seen in eighteen years of being in this business. Why do I say that you ask? Because, although hindsight is 20/20 (and that is a big caveat) I cannot remember a time where the market felt so hostage to the economic and particularly the political background as it is now.
Ah, I hear you say what about the crisis in 2008? I believe there are some important differences we as investors need to be aware of:
The market and investor sentiment leading up to 07-08 were very positive; the giddiness felt by most investors was so mistaken, that when the fall began, there were plenty of sellers to be found as the pain intensified from the rescue of Bear Stearns to the collapse of Lehman Brothers and the demise of so many investment firms.
- Today however there are plenty of naysayers which seem to have limited the supply of potential sellers in the market. In fact, retail investors have withdrawn more than 400 billion dollars out of equity mutual funds in the last two years. In addition, whenever we have gotten a market upswing, the chatter on the street is that institutional investors are very under-invested in the market and have not kept up with their benchmarks in terms of performance.
- Technical signals (which give us an idea of either how positive or negative market participants feel, as well as which force may be in control of the market, supply or demand for stocks) have been muddy to say the least! What I mean by this, is that more often than not in the last six months the indicators I and others look at show continual disagreement as to the direction of the market.
Given the above, here are some of my thoughts on where the market is and what we should be doing going forward.
- I believe the market will continue to be held hostage by headline risk and structural headwinds from Europe and elsewhere in the world. At the very least I see Europe having tepid to zero growth going forward if not going into outright recession. This impacts the BRIC nations (Brazil,Russia,India and Chinawhich are export driven economies), slowing their potential growth going forward.
- The best defense in this environment is to concentrate on stocks and bonds of companies that are paying attractive dividends or interest rates and have strong balance sheets and good business prospects despite the current economic environment. Stay small and buy partial positions—it does not pay to be a hero in this market.
- I still hear concern about inflation from clients and a few intransigent money managers (like commodities king Jimmy Rogers). I am not in this camp and although we continue to have loose monetary policy from the FED, I do not see inflation indicators flashing red. Most commodities like Copper, Aluminum, Steel, Coal and Natural Gas (oil has been an exception—the Middle East seems to keep a bid under oil with the political turmoil they are experiencing) have collapsed over the last three months hinting at the slowing in the global economy, particularly in China. As such, I am not a fan of gold in here. I continue to believe the U.S. is the best house in a bad neighborhood.
This market reminds me of an unpredictable drunk who could sucker punch you at anytime. The best thing to do in those situations is to keep your guard up—have some cash, buy some corporate bonds and common stocks that have real dividends and interest with strong balance sheets… and remain watchful. It does not pay to take big risks in here—move slowly if you’re not a trader, and do your homework. As always, comments and questions are appreciated and can be posted or sent to firstname.lastname@example.org. Be careful out there!
Disclosure: The examples cited herein are for illustrative purposes only. It does not represent any particular investment. Technical analysis, broadly defined is derived from the study of market participant behavior. Like other forms of analysis (fundamental), methods and resulting opinions may vary and can be subjective. Some models and rules when applied to managing a portfolio may incur high transaction costs. The opinions rendered in this article are those of the author and are not investment advice. Investment in equities involves significant risks, you could lose some or all of your investment. Past performance is not indicative of future return.