TIME TO SOBER UP?
A value investor waits for opportunities to acquire businesses and assets when they are trading for less than their intrinsic values.
As a client of Unicorn, we have been stocking up your war chest with gold and cash for this very purpose. We believe that support for this bull-run in the U.S. is running out of steam, and you will be able to purchase assets at more attractive prices when the correction occurs in the short- to medium-term.
This has been our stance since end-2013, when we ended our exposure to the U.S. We also started reducing our investments in other equity markets thereafter.
Too Fast, Too Soon?
Historically, a bull run for the Dow Jones Industrial Index (DJIA) lasted an average of 43 months, while the average duration of the last ten S&P 500 bull markets stood at approximately 58 months.1
By end-2013, the bull market had already run well past its historical average. We pulled the plug as we felt comfortable with the profits we have garnered for our clients. More importantly, we felt we had a bull that was probably on its last legs. We did well for our clients – clients who have taken on our advice since 2008 to invest into the U.S. But admittedly, on hindsight, we could have done even better.
Since then, the bull continued to run on, pushing markets to new highs despite periods of volatility. As of March 2018, the DJIA has seen its longest ever and greatest percentage gain since World War II. Similarly, the corresponding run by the S&P 500 constitutes the benchmark’s second-largest and second-longest bull market ever, second only to the 1990s tech boom.1
Going Strong, Or Steroids-Driven?
Recent U.S. economic data seem to suggest that things will continue to look rosy.
For example, the state of the U.S. manufacturing sector — represented by the U.S. Manufacturing PMI – stood at 56.5 in April 2018, versus 55.6 in March. This is the strongest pace of expansion in the sector since 2014.2
During the same period, the U.S. unemployment rate fell to 3.9% from 4.1% – the lowest rate since December 2000.3
Consumer prices edged up 2.5% in April from 2.4% in March. Inflation is now at its highest since February 2017. This is below the long-term historical average4 but well above the 2% inflation ‘target’ widely accepted by Federal Reserve (Fed) officials.5
This is probably why investors are still buying equities, thus prolonging the bull run. The sustained expansion of the economy over the years seems to indicate that things are rosy and well, especially for stock markets.
However, we believe this is due to the Fed’s long-term ‘steroids-driven’ (monetary stimulus) policy, rather than the strong fundamentals of the economy. While we acknowledge that the Fed’s quantitative easing (QE) policy has driven real growth and progress in various facets of the U.S. economy, our view is that QE has mainly fuelled asset price inflation. Our biggest concern is that stock prices have moved far beyond the economic improvements seen in the economy, and it is this divergence that has us expecting a correction in the markets in the short- to medium-term.
And with the Fed increasing interest rates again in March 2018 – the sixth time since December 2015 – the excess liquidity that was and is still driving up asset prices is starting to dry up. Things could worsen with the market currently expecting at least another three more rate hikes in 2018.6
What Should You Do?
The stock market is a story of cycles and they are an investing reality. There is therefore no doubt in our mind that a market correction is bound to happen. As Sir Issac Newton famously said, ‘what goes up, must come down’.
It is no longer a question of whether a correction will take place, but when.
In light of the above, we suggest that you ask yourself the following two questions:
1) Do you think that markets will continue to rise in the short- to medium-term?
2) Do you dare to put skin in the game, and invest more money?
If your answers to both questions are ‘yes’, you should have no qualms with adding more equities into your portfolio to take advantage of the capital gains that you expect to reap.
If your answer to either or both questions is ‘no’, you are better off staying on the sidelines. You should wait patiently for the markets to turn bearish before going back in. You are almost certain to win with little effort when you invest in such a scenario.
What Is Unicorn’s Stand?
Unicorn believes that it is possible that markets could continue to rise but is unwilling to put more money into the equity markets back then and now.
We are fully aware that this means you may miss some further capital gains. However, we believe that the risks that you would have to undertake in return for these gains are not worth running.
We think the pain of losing the hard-earned funds and profits amassed over the years will be harder to swallow should things turned out differently. As the famous adage goes ‘Hindsight is 20/20’. Losing out now would be less painful than losing it all . It is during times like these that we must turn to investment gurus such as Warren Buffett to seek solace and wisdom.
During the Dot-Com bubble, Buffett was suffering a 49% loss while the NASDAQ and S&P 500 rose 140% and 28% respectively. He was publicly ridiculed for sticking to his guns of not touching internet stocks, which were the hottest things in town. Some suggested that he had lost his golden touch, but Buffett had the last laugh when the bubble eventually burst. Buffett’s investment gained 80% over the next two years while the NASDAQ and S&P 500 lost 72% and 28% respectively.7
You will have realised that we have taken this page out of Buffet’s investing playbook and believe our current approach is the most sensible as the shepherd of your investments.
Our gameplay may not be the most appetising currently, but as Buffett would remind us again: ‘the less the prudence with which others conduct their affairs, the greater the prudence with which we must conduct on our own’.
1 – On the Bull Market’s Ninth Birthday, Here’s How It Stacks Up Against History
2 –United States Manufacturing PMI
3 – United States Unemployment Rate
4 – United States Inflation Rate
5 – The Fed Must Teach Markets a Lesson On Inflation
6 – Fed Hikes Rates and Raises GDP Forecast Again
7 – Warren Buffett’s Worst Loss Came During the Dot-Com Bubble
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