Recession or Bear Market?

Thursday the stock market was down ~25% from peak. Oil fell to $31 per barrel. Even Gold fell this week to $1,528 per ounce. Then Friday came and the stock markets went up ~5% and Oil recovered to $33. Covid-19 is everywhere and this is a Bear market.

Between the sensational news, stores out of toilet paper, poor press conferences, and canceled schools, colleges, events, church services and sports - would conclude this is a Panic. Stock markets are really driven by investor psychology and groupthink. Friday’s recovery shows not all is predictable.

However being this is driving by a new disease which is stopped international trade and travel. No one knows how long this will go, and vaccines are months away. Once the market has picked a direction, it tends to continue longer then we expect it will. Bear markets often lose 20-40% or more. Suspect the market will overshoot as it often does.

So what do we do now? Depends on your situation. 

If you are over 5 years from retirement, you have the option to do nothing and keep contributing to 401K. Second choice would be to move 10%, 25% or 33% from stocks to cash or bonds, and keep contributing. The worse choice would be to move 100%, and then see the stock market recover.

If you are in or very near retirement, make sure you have liquid funds for the next 3 years, and keep the rest invested to recover what we lost.

Problem is bonds are returning a very low interest rate, and rates are so low not to fall much further raising the value of your bonds. Cash earns very little return. Where can you invest? 

Dividend stocks, real estate and commodities like Oil and Gold are used to diversify portfolios to improve returns. Real estate has been high priced for a while. Gold and Oil may return to normal after the Covid-19 subsides. Saudi Arabia’s move to grab market share will not keep the price of oil down over 3 years. Where will oil be in 10 years?

Professional investors are searching now for good profitable companies that stocks prices fell lower than the company will be worth. Do you think all cruise lines, airlines and hotels will stay down for long after the pandemic is over? Where will the world be in 5 years? Expect the world economies to be growing again.

Warren Buffet and Charlie Munger are sitting on a pile of money, and have not been happy with the price of businesses. They and their investment managers are looking at businesses they would like to acquire or buy stock at their new lower prices. Warren and Charlie look for a good price on wonderful business and take advantage of opportunities when others are fearful. Suspect they will lend money at a profitable rate to companies that need it.

Consider working an additional year or two before retirement. If like me your business is adversely affected, you may want to improve your skills in case you need new opportunities.

“This Too Shall Pass” had gotten me through many of these situations over the years. Stay calm and healthy please.

Coming in 2016

Know it is not New Year’s Day when predictions typically come. Truthfully have been looking for trends and indicators before making up my mind during a volatile December and January. Here are keys for 2016 and possible gray swans that could be missed.

1. Global Economy will continue to slow down gradually. Predictions of end of the world will surround us, but main drivers are a slower growing China economy and governments will need to reign in spending. Do not expect China to have a hard landing, and expect several governments will cut spending slowly over the year as tax receipts are reduced by their economies. Middle East and Asian countries most affected.

2. US Economy will have a mild recession. The long slow growth is due for a pullback, but do not foresee a collapse. The US economy will stabilize the world economy. Stock markets may fall further than the economy over weaker earnings and short term jolts to expansion plans. We may already have over 50% of the stock price pullback. Typical recessions stock losses are 15% to 30%.

3. Commodity prices will stay weak until the global recession passes. Expect industrial metals like copper & iron stay weak for a couple years. However most of the price drop has already occurred. Will hurt Australia, Canada, Russia, and South American countries dependent on mining.

4. Silver is forming a bottom around $14. Moderate chance could step down a bit more, but likely price will increase by end of year as mining slows down and supplies get tighter. Gold is trying to form a bottom, but is more of an emotional investment driven by fear. Could take one more step down or start another bull market. Consider accumulating both gold and silver in 2016.

5. Oil should stay weak for now, but expect prices to turn up a bit in summer to end of year. Expect prices to rebound to $40 to $55 per barrel by mid-2017 at the latest. Think the cartel will pull together sometime in the next year. (gray swan)

6. Unemployment will likely stabilize as job growth slows. Truth is the easy productivity games are ending. Robotization is a time-consuming investment more likely during growth cycles where payback is guaranteed. Having participated in both successful and unsuccessful automation projects, it takes time to develop robots and computer programs.  However it is a good investment for your business during a mild recession to prepare for the next growth spurt.

7. Gray Swans:

            ISIS/Daesh - will weaken in Syria / Iraq under direct pressure. Will grow stronger in Libya and Africa where non-functioning governments cannot handle the crime.

            Europe - Economy is recovering, but slowed by less demand in Asia. Will struggle with more immigrants coming and increased nationalistic parties gaining power. Will see Eastern Europe struggle most, but watch Italy, Belgium, France and Spain for risk.  

European Union - Not likely, but countries leaving the union would be considered a serious warning for the end of the Euro.

Terrorism - Expect more attacks on soft targets like malls, restaurants and hotels.

Computer Hacking will increase in 2016 and become more of international issue.

2016 is setting up as mild year with increasing risks. Also see there will be pleasant surprises with new technologies, medical treatments, disruptive companies and areas of growth to offset some of the worries. Stay positive and looking for opportunities.