The new year is upon us and it is unlikely 2019 will be anything like 2018. However, each year we do our best Carnac The Magnificent impression and try to forecast the possible winning investment themes for the coming year.
Our track record is a bit fuzzy, just like my memory of the Tonight Show when Johnny Carson was the host, but we still persevere.
Here are our five investment themes for 2019:
Let’s take them one at a time quickly.
Short is the New Long!
No this isn’t some forecast about the latest fashion trend, although that may be more interesting to many of you. In case you didn’t know, short (or shorting) refers to selling (stocks or other securities) in advance of acquiring them, with the aim of making a profit when the price falls.
The simplest example is the investor who borrows 1000 shares of General Electric (GE), he sells the borrowed shares and then hopes to buy them back at a lower price at a time in the future and return the shares to its owner, thereby pocketing the spread.
We believe 2019 will be the year that stock markets finally trend lower with a series of lower highs and lower lows. We may see some kind of rally in the first quarter of 2019 following the fourth quarter sell off, but we believe the trajectory of Federal Reserve interest rate hikes and balance sheet reductions will continue to put a strain on U.S. growth (and consequently world growth) and thereby be reflected in lower equity prices.
Hey, we have not had a recession in over ten years, we are due!
In a recession, stocks tend to trend lower and those who short stocks (as opposed to buy and hold stocks, called being “long”) tend to win.
Cash is King
Cash has been trash for the past ten years. Leverage has been the place to be with historically low interest rates and a slow growth economy.
Now with markets, both stock and then ultimately economic, headed lower, cash will be a much better store of value. This stable store of value will also allow smart investors to cherry pick the deals that will likely be available when markets finally bottom in 2020 or 2021.
Interest rates are still historically low, but a low return on cash still beats a negative return any day!
Gold and Silver Will Challenge Three Year Highs
Gold has been headed higher and silver recently broke above prior trading levels and it appears that precious metal in general want to move up.
Many times precious metals do move up at the beginning of a stock market trend change.
So logically, if we look at the above chart it would make sense that precious metals (gold in the chart) would challenge recent highs at 1370 and maybe move much higher depending on the severity of the economic decline.
Fixed Income is Back!
Interest rates moved higher for three quarters of 2018 and this was a negative for fixed income, but now with the economy expected to cool, we believe rates will continue to moderate or at least chop sideways.
This should be good for fixed income securities as lower interest rates mean rising fixed income prices.
A flight to safety may also increase demand for fixed income securities as cash has to go somewhere once it is removed from the equity markets.
So far in the fourth quarter sell off this has held true, however, rates have not declined as much as I would have expected so this could change as soon as economic growth returns to the system. In English this means we believe rates will decline with the markets, but could start rising again as soon as the predicted Bear Market subsides.
Trend Followers Will Have a Massive Year
It has been a tough ten years for the trend followers who primarily use managed futures. This group outperformed all other manager types in the Great Recession of 2007-2009, however, they have had a rough go of it the past ten years, as you can see below.
We believe this manager group which trades financials, commodities, currencies and more will have a fantastic 2019.
Why? Because we believe there will be a solid trend to the downside and little the government can do to stop it once it get’s rolling.
These guys know how to short and have the models to give them the sell signals to execute them. 2019 could be a very good year for them!
Well there you have it, our top five investment themes for 2019. We hope you and your family have a Happy New Year!
InTrust Advisors is now a boutique multi-family office.
I know what you are thinking – “who cares?”
However, if you give me a few minutes, I want to show you why you should care.
First, off what is a family office?
“According to Forbes, a family office performs centralized management or oversight of investments, tax planning, estate planning, and philanthropic planning. Perhaps the simplest definition of a family office is an organization that assumes the day-to-day administration and management of a family's affairs.”
In our case, we do those functions for multiple families thus the multi-family tagline.
We are boutique in that we are small and intimate, like a boutique hotel in your favorite travel destination or an old fashion family doctor.
Finally, we are virtual in the fact that we work with a group of your professionals or those outside professionals we may introduce to the process to facilitate your planning and structure management.
So now the part you may care about. The answer to the question “why do I care?”
The simple answer is that most advisory or wealth management firms just do basic financial planning and investment advisory for the masses.
They do not offer the next level services to actually help you manage the structures they helped put in place.
We can do more to help you remove those management burdens, while delivering more peace of mind.
Check out this list of possible services we offer our clients in addition to wealth planning and investment advisory services:
As the complexity of our families' needs increase, so do the breadth of the services we can offer including the pinnacle of such offerings, family office services.
None of this is one size fits all! It is all customized to your needs, whether large or small.
In the case of the family office and family owned business services, we don’t even need to manage your investment assets to help you.
Everything is a la carte and customized to your needs, just like a fine boutique hotel or the type of service provided by an old fashion family doctor.
How can we help simplify your life today?
“Buy and hold for the long term! Markets go up and markets go down but in the long run markets have gone up at an 8% annual clip.”
How does that make you feel? Better?
The market is dropping precipitously on a daily basis and all you are told is “to stay the course.”
However, your broker is not the one who has to live on these savings later in life!
Maybe this is how you felt during this most recent of two 2018 market swoons.
Really all you want is a straight answer and somebody who cares.
Well today, I hope to give you that answer.
Is This The Bear Market?
The answer is probably, but we will only definitively know in hindsight.
What we have seen is that the major indexes have given us a bearish divergence on our long-term (monthly charts) which usually means things have changed and the trend is changing.
We have trend lines being challenged and indicators that have historically signaled longer term downward price action crossing key levels, like the MACD histogram at the bottom of the above chart.
Do you need to panic yet? No.
Markets do go up and markets do go down and unless this is a market crash (which no one can predict), this market will bounce again.
The Big Question
The big question is when it bounces do you have a plan?
You know something other than “stay the course.”
Here is our plan:
Step one – take off some market exposure. Check. We did this early on in the decline.
Step two – wait on the bounce, see where it goes and make adjustments to market exposure as necessary. Adding on the rise, removing exposure on a peak.
Step three – continue to adjust exposure as necessary as market confirms trend change.
Step four – enjoy the circus as a hedged (or net short) participant.
Now I know this seems simple and believe me it is not. But does your advisor have a plan?
Our plan may not work out exactly as advertised but at least we are doing our job of trying to client protect capital.
What About The Fact That Markets Always Recover?
Great question and no doubt this one will recover (if you live long enough). The Great Recession of 2007—2008 recovered its losses in five+ years because of substantial government intervention.
The underlying excesses were never really corrected, just papered over. So with Federal Reserve interest rates still quite historically low and their balance sheet still very large, what are the odds they will intervene in any substantial way this time around?
I would guess, not very great!
So what if the recovery this time takes eight or even ten years? How would that affect your financial planning?
For most Americans, it would be devastating!
Here is the math for you technical few:
A 50% decline in the value of your portfolio requires a 100% return to get back to break even.
If the market average is 8% for the sake of argument, how many years would it take to recover just a 45% loss?
Almost 8 years.
So if we had a 50% decline it is quite feasible you could spend most, if not all, the next up cycle just trying to get to break even. Just reaching break even in time for the next bear market assuming a 10 year cycle, which is one of the longest in history already.
The solution is simple! You have to do something.
Don’t let some newly minted broker or advisor tell you to just “buy and hold.” In this market, that could be a recipe for disaster!
Let us know if we can help.