- the source for market opinions


August 5, 2019 | OMG

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

Immediately after Ryan and I told you how to deal with investment fear, along comes something to be afraid of. I mean, how cool is that? Consider this an emotional test. And no cheating.

First, the context.

After soaring for all of 2019, setting new record highs and gaining 15-20% in the course of just seven months, US stock markets laid an egg Monday. Buy-buy-buy! turned into OMG-sell! Classic. Stocks plopped, bonds soared, oil ebbed, gold flowed and risk came flying off the table. When the dust settled, the Dow was down 767 points (2.9%). Scary, but Monday didn’t even come close to being in the Top 20 worst days.

Why did this happen?


What next?

More, probably. Trump imposed 10% tariffs on $300 billion of Chinese goods (on top of his last round of tariffs). The crafty Chinese responded by devaluing their currency and wiping out the effect of the taxes. So we can probably expect more from the White House. Not only is the American president catering to the anti-Chinese, anti-globalist, anti-outsourcing sentiment of his political base, but by creating financial chaos he’s pursuing what he really wants – big interest rate cuts. The US central bank is against the wall, forced to consider stimulus to counter the destructive impact of a trade war. A war Trump started. A war he just accelerated. No accident there.

It’s a giant game of presidential chicken. Trump’s gambling he can cause a crisis then pull out a win before the economy hits recession. Given that this is the longest recovery in history, the global economy is slowing and central banks are already turning on the taps, it’s quite the crap shoot. And into the mix is the 2020 American election. Is Trump planning on going into it on a wave of economic growth and market expansion based on deep rate cuts, or will he be a war-time leader mobilizing against the Yellow Peril? How can either of those end well?

What to do?

Just chill for now. Don’t buy. Don’t sell. In a storm you stay put. If you’ve learned anything from this pathetic blog, you have a balanced and globally-diversified portfolio with a track record of quick recovery from market declines. Stocks go down. Bonds go up. Fixed-income assets keep turning out income. Over time, the gale passes. Just look back at the 20% sell-off in 2018, the oil crash in 2015, the debt ceiling crisis of 2011 or the GFC which halved stocks in 2008-9. In every instance investors who reacted to short-term events took a hit. Those who ignored it all, lost nothing. Today those events are curious little jerks on a long-term chart of advance. Like this:


Monday’s 3% clobbering could be followed with more over the next few days or weeks. “We conclude that the stock market is poised for a correction and a valuation reset,” one set of analysts writes. “Based on recent and past history of corrective episodes, we project a S&P 500 downside target of 2598 to 2891, with an average of 2738, or a -9.3% drawdown. From a valuation perspective, this translates into a forward P/E ratio of between 14.7 and 16.4, with an average of 15.5.”

Translation: No recession. A market correction. Maybe Trump backs off. Perhaps the Fed cuts next month. Maybe Beijing blinks. In any case, a 9% or 10% pullback would be what the 20% drop was last year – a chance to trade in those GICs for something more lasting with growth potential. Unless you have a few million bucks or a fat government pension, you need growth. You won’t get it hiding under the hot tub.

But wait. What if it gets worse?

Same advice, if you followed the plan. Otherwise stay tuned for squirrel recipes.

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August 5th, 2019

Posted In: The Greater Fool

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