Get Paid and Wait out the Storm
Posted on Sunday, December 16th, 2018
This market has been volatile to say the least and the holiday parties have been a long line of people asking me about the idea of “getting out” of the market. We wrote this to a client this week about recent volatility and we thought we would share it with you.
One other important concept to understand when it comes to successful investing is time and its impact on a portfolio. Investing for retirement means staying invested. We cannot afford to sit on the sidelines and wait for the investing climate that we want -we have to deal with the one we have. We cannot afford to lose out to inflation so we need our assets to provide cash flow and to grow – and to do that we have to take on risk. Our retirement income is dependent on being invested. What we seek is the income that our assets throw off, like dividends from companies like Philip Morris or Coca Cola. Those dividends and our interest from those investments give us an income to spend much like rent from a building. We still have to own the building to get the rent otherwise we are just spending our cash and being in a cash burn situation is never healthy. The advantage (disadvantage) of stocks and bonds (temptation to time the market) is that they are liquid. What we can do with stocks is roll up or roll down our risk exposure according to where we are in the market cycle. If stocks are expensive we roll down our exposure and if markets are cheap we take on more exposure but we never get 100% in stocks or 100% out. I once had a client say to me that he likes to be 50% in stocks and 50% in bonds because that way no matter what happens in the market that day he is happy.
We currently have a defensive posture and are currently substantially underweight equities for all of our clients. That gives us more dry powder to use as market prices get cheaper. Like buying groceries at Shop Rite if Filet Mignon is on sale we want to have the money to buy two. Keep in mind the realization that if stocks were to sell off more that would actually decrease the risk of owning them and increase our likely returns.
Ned Davis Research, whom we highly respect, was out with a research note this week which stated that they believe that the market will be down 20-25% over the next 7 months but this will be a non recessionary bear market ending in early Q2 2019. We have to agree with their assessment for now as the economy stills seems on track and we suspect that the inversion of the yield curve, which is signaling recession, is technical in its nature and a recession is not on the horizon. A non recessionary bear typically lasts 7 months and down 20-25% seems reasonable. We are already down 10% from the highs. 2200 on the S&P 500 is down 25% from market highs and is the launching point from the 2016 elections. That may be where we are headed.
The old Wall Street saw is that a bear will come to Broad and Wall should Santa Claus fail to call. A weak December has Wall Street shooting first and asking questions later. We have been consistent in saying that we are stuck a large range between 2550-2950 on the S&P 500. We have also demonstrated a mini range of 2625-2825. On Friday we closed at 2600. The break below 2625 means that markets will need to test the early 2018 lows and broader range lower limit of 2550. We think that Wall Street may not have studied for that test and a breakdown to 2425 is in order. Perhaps, at 2425, we could get the capitulation spike we have been looking for. Russell 2000 and mid caps seems to be leading the way with financials now a contributor. The market will not rally without the support of the financials. Keep an eye on JP Morgan which is THE financial stock.
This is the Everything Bubble. Some are looking for it to pop. We see it as more of a deflating. The excesses of 2000 or 2007 are just not there and the economy seems to be stable. This deflating could last some time but we don’t see the radical repricing of 2007 on the horizon. Maybe this is worse in your opinion as it may take some time before we begin to head higher again. We like value here and getting paid while we wait for bargains. Cash is yielding 2.4% and there are quality companies yielding 5% out there. Get paid and wait out the storm.
I think we aspire less to foresee the future and more to be a great contingency planner… you can respond very fast to what’s happening because you thought through all the possibilities, – Lloyd Blankfein
To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com .
A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill
Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor.