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!