I’d like to apologise.
I think I may have got ahead of myself.
I’ve been bashing the bear drum for a good month now.
With each passing week, as the rally progress, in my mind the case for caution becomes stronger.
But I am forgetting myself.
The point I want to make is that we cannot predict the future, all we can do is prepare.
And so yes, I am keen to make you all aware of the risks we currently face. I do believe that we are still in the grips of a powerful bear market that has by no means run its course.
But there are alternative outcomes.
Firstly, people probably thought that there was much worse to come in 1998 after Long-Term Capital Management went bust along with Russia and half of Asia.
The S&P 500 went from 1,190 to 920 in a matter of weeks, a 23% decline.
After a ten-year bull run, which saw the broad US index grow six-fold, the collapse of the most heavily leveraged and central hedge fund on Wall St alongside national defaults across Asia and in Russia, many investors would have been warning the 23% was by no means the bottom.
And they’d have been wrong, because firstly it fought back to what seemed like extreme highs of before the crisis (which I recommend reading about if you don’t know about it, it’s fascinating – here’s the book you want).
From that point though, there were another great couple of years in store for investors.
A 30% gain was on the cards before the true crash came, when the index fell from above 1,500 to around 750 – a 50% decline which took just shy of three years to play out (23 March 2000 to 12 March 2003).
From the pre-LTCM crisis peak level of 1,200 in June 1998, that means two things.
Firstly, that it was not the best time to sell.
It was, however, a time to sell.
You could have made an extra 30% before the crash – if you correctly sold further down the line.
But every time you bought after the crisis was simply a route to larger losses over the following five years, if you failed to sell before the peak.
So if you are buying now, you either need to be buying with a view to selling before the bear returns, or with a ten-year view.
And a genuine question here – feel free to write in to [email protected] – how long do you usually hold positions for?
It seems as though everyone wants to think of themselves as long-term investors, but actually, we tend to find reasons to exit positions much sooner than ten years or even two years.
Anyway, the point is that in 1997, ‘98, and ‘99, people would have been predicting an imminent crash, and they were all too soon, in theory.
And in investing, being too early is as good as being wrong.
That’s why balance remains so important. And an eternal focus on cycles. Take gold and stocks. They have fluctuated cycle by cycle for the last 30 years.
Here are three charts of the S&P 500 vs the gold price, in USD. Firstly, from 1987 to 2003:
You can see that stocks (red) outperformed hugely, until 2000. Once they started crashing, gold (blue) actually rose 36% from 2000 to 2003, though it hardly shows on that chart.
Next up, the bull market from 2003 to 2009:
This time round, the full lap of stocks registered a negative result over six years, while gold returned 190% – a complete reversal from the previous cycle. But if gold investors had got too cocky and forecast further gains…
… they’d have been disappointed for a decade:
Since 2009, stocks have outperformed wildly once more, and until very recently, gold had once again offered nothing for almost a decade, as in the 1990s. But since September 2018…
Take a look here – since 27/09/2018, when the S&P peaked before its winter 2018 mini crash, gold has outperformed it massively, and with much lower volatility too.
With stocks soaring on the hopeful bullishness of day traders and J POW at the Federal Reserve, and gold looking to catch up after a decade of underperformance, it must be worth your consideration.
You can find out how to approach investing in gold and other anti-correlated assets…
Investing is the discipline of decision making under uncertainty. Seeking certainty is most certainly a fool’s errand. “What gets us into trouble is not what we don’t know. It’s what we know for sure that just ain’t so.”
So I apologise for banging the bear drum too forcefully – and for being wrong so far (early). I just want to make sure we’re prepared for all eventualities, and I fear charts like these:
Source: Tavi Costa, on Twitter
And I still believe in balance – mind! I’m not entirely anti-equities by any stretch.
I see great potential for energy transition stocks, beaten-down value stocks (eg, in the oil sector) as well as gold miners and precious metal plays. All have great near-term potential (crash risk aside) but are potential decade-long trends too.
And lo and behold! Check out the one-year performance by sector for the US:
Gold miners and renewables have smashed it, and oil stocks are about as beaten down as it gets.
That’s why I’m also interested by banks (4th bottom), limited as I am by a weighty lack of expertise in the sector.
It’s annoying to always use American charts and sectors I realise but Koyfin (which is brilliant) is very US focused and has the best tables and charts going, so it’s more illustrative, and we can assume that here in the UK this kind of thing has followed a similar pattern. But I should look at the UK more often I realise.
On that note, I’ll leave it for today and be back with you for another energy special on Friday, before next Friday’s book review of Anatomy of the Bear by Russell Napier.
It’s pretty tough going I’ll admit – quite academic and dense, but rewarding and I’m enjoying getting through it.
Best for now,
Editor, UK Uncensored
PS Football returns tonight! Silver linings and small mercies, that’s what it’s all about. Enjoy!