bear market

  • Dances with Bulls… & Bears

    Late Cycle Opportunities and Risk

    As we enter the second half of the year global stock indexes have exceeded almost every strategist’s expectations. This powerful advance has just slightly erased the entire steep decline of 2018. It is unusual since it hasn’t been based on any strong underlying themes. In fact, stocks have rallied into declining economic growth and corporate earnings, a tariff war, and a Federal Reserve which has become concerned about the potential for a recession. So what gives? Is the stock market vulnerable? Is there more upside left? I would suggest a little of both.

    During the later stages of an economic expansion, stocks often stage a “super rally” before running into trouble. Investors who recall 1999’s astonishing advance just before the 2000-01 bear market (-50% for indexes) can attest to this phenomenon. Like today’s rally, ‘99 came after a significant warning decline in ‘98 (Russian debt crisis). That decline was quite similar to the mini bear market of last fall. Late-stage rallies like today or others in history can go on longer and higher than investors expect – usually on less than perfect economic and earnings growth – and can be tricky. Our human behavior doesn’t want to miss a stitch of any upside, but we also don’t want to be vulnerable to a significant decline. There are several ways to play this scenario.

    So far my strategy for this late stage rally has been to have less stock exposure. Sacrificing some upside to mitigate risk and adding to stocks only on market corrections and or when we find unique situations. At this point, your portfolio is 2/3rds invested as opposed to 100%, but given that the Federal Reserve may lower rates to “save the market”, what if the late-stage rally lasts another year?? Should we be more invested? Yes, but only during market pullbacks.

    As long as you add stock exposure during market corrections, as I suggested did in May, you are assured of taking less risk and getting your portfolio closer to index-like returns over time. Each time indexes trade down, your portfolio holds up better and your opportunity to add stock presents itself. It’s a “dance” of sorts and I know this process can test the patience of the most aggressive, growth-oriented investor, but historically it has worked. When I say it worked, I mean it gained return while managing risk.

    Over the next few weeks, I will be in the thick of earnings reports for the second quarter. I believe these earnings will be less than expected and coupled with continually weaker economic data and tariff pressure. Investors should expect a normal market pullback from current levels and use such a pullback as another opportunity to add stock exposure.

    You can continue to gain profitability in this late-stage bull market, but it is a riskier environment and one that requires you to be aware of downside risk. Keep in mind that should stock prices begin to fall more than normal, you should be willing to reverse your “dance” pattern, reduce stock and sector exposure, and continue to have stop-loss orders to fend off a catastrophic loss.

    I hope this short update is helpful as we head straight into the earnings reporting season and provides clarity on our opportunistic view of the markets.

    The Sustainable Endowment was written for executives and board members of small- to mid-size U.S.-based nonprofits, charities, or foundations. Running a nonprofit requires specialized knowledge and skills, especially regarding foundation management and investing your endowment so it remains sustainable for years to come.

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  • Market Rise Driven by Speculation…Not Positive Data

    My Strategy for a Good Year Regardless

    The recent advance in stock prices has been stellar and has caught most investors by surprise. The biggest mystery surrounding the recent rally is the lack of any signs that the economy or corporate profit picture is improving. In fact, during the last two months, economic data points both here and abroad continue to show signs of slower than expected growth, while corporate profit growth targets have been unable to meet previously lowered guidance.

    If economic growth and corporate profits drive stock prices (which is how it’s always been) how can one explain the market strength in recent months? Is the stock market indicating that the recent global slowdown will be over sooner than we think? Or is the recent rally based on overly enthusiastic investors simply participating in an all-too-common case of chasing stock prices in a bear market rally? Let’s take a look at both scenarios and provide you with an update on my strategy going forward, and why I am optimistic about your portfolio’s performance as the year progresses.

    As a reminder investing aggressively in the face of a significantly slowing economy and deteriorating corporate profit environment is risky business. It is during these types of circumstances that investors have historically been hurt most – think of past bear markets (2008 or 2001) that started in a similar fashion – hence our more careful approach in recent months.

    Was all of the “bad news” already in the price of stocks back at the December lows?
    We are just weeks away from corporations reporting their earnings for the first quarter of this year, which should be very telling. Included in this data will be the impact of the long US government shutdown and the negative affect it had on consumers and business spending during those three months. These upcoming profit reports will likely be worse than the previous quarter, and far worse than comparisons to a year earlier. Maybe the recent market strength is a sign that both upcoming and future reports will not be as bad as originally suspected?

    The Federal Reserve appears to be much more accommodating which is supportive for the market. Historically, stock markets often begin rising before profit growth improves (speculation by investors) and it is possible that we are witness to such a phenomenon at this point. If that is the case the market lows of December would not need to be revisited and the bull market will continue to be alive and well for now.   Over the next few weeks, I will be watching earnings and economic data points for confirmation that this is in fact true. If that is the case, I plan to use any temporary weakness in stocks to become more invested.

    A normal market correction is way overdue
    Both bullish and bearish professional investors agree that we are way overdue for a normal correction in stock prices after such a strong rally and we should use that weakness (combined with a more supportive outlook) as an opportunity to reinvest. Upcoming negative earnings reports will probably be the catalyst of a normal correction. A normal correction (8-10%) would provide an opportunity for our performance to get back in line with markets (I am looking forward to that!) and set us up for a strong and profitable year.

    It is possible that all the bad news hasn’t been fully priced into stocks
    The alternative and less optimistic case to the one described above is that stock prices at current levels are not priced correctly (too high) for the upcoming (negative) data on both economic growth and earnings. In this scenario, stock prices would adjust downward, most likely closer to the lows of December and possibly lower. Though the recent market strength is encouraging, stock prices have failed to reach previous highs and, in some sectors, are nowhere near those levels.

    From a purely technical level (looking at charts) the market has struggled in recent weeks to make any serious progress which may be a sign of an upcoming correction or perhaps something worse. As I have reminded investors, bad or “bear” markets don’t take long – months not years – but average declines are close to 40%. I want to ward against this type of loss by advising you be less invested as you are today, but also take advantage of the great bargains that become available after bear markets, which your more defensive posture will allow you to do.

    It isn’t easy being less invested during a temporarily rising market. However, historically, the outcomes have sided with patience.


    The Sustainable Endowment was written for executives and board members of small- to mid-size U.S.-based nonprofits, charities, or foundations. Running a nonprofit requires specialized knowledge and skills, especially regarding foundation management and investing your endowment so it remains sustainable for years to come.

    This book walks you through the basics and best practices of what you need to know to be successful.



  • “Should I Stay or Should I Go Now”

    Is Recent Stock Market Strength a Sign of Safety…or Danger?

    Since early October there has been a “bear market” in stocks, both here and abroad. Though some indexes declined approximately 20% from their highest point, most stocks were down much more until just recently. In the past few weeks, stock indexes have rallied about 10% providing some relief for investors, but far from the peak reached in late September.

    This is a good time to explore if the recent strength in indexes is the beginning of a better stock market or just a short-term advance leading to further trouble ahead. As you know we have kept your portfolio defensive during this period, with less stock exposure and less volatile stocks. Though this is effective during market declines, it can be a bit trying in the face of the recent market strength.

    How can we determine if there is further downside ahead or if the recent rally is the beginning of a real recovery? Let’s review the data points that were the cause of the tough market. In my view, we need these data points to stop trending downward or to become more clarified, before we take a more “risk on” growth posture. 

    Economic Data
    The economy and stock market are co-dependent. The first sign of economic weakness at the end of the third quarter is what sent stock prices into the downward trajectory. Since that time most leading economic indicators continue to be in a downtrend. Investors need global economic growth to stabilize stock prices to stage a meaningful long-term recovery. If economic growth can stabilize – albeit at a lower rate – stocks could still do very well and better than most investment alternatives. However, we need to see clearer signs of stability on this front.

    Corporate Profit Growth
    Economic growth is directly tied to the profitability of companies both here and abroad. We are now at the beginning of earnings season and need to see companies meeting or exceeding the lowered expectations that analysts have adjusted downward since the fourth quarter. Some of the most recent warnings and reports have not been positive, including Apple, JP Morgan, Macy’s and Ford – all of which have been negative.

    However, the earnings season has just begun and we have some big bellwether companies reporting over the next few weeks including domestic heavyweights Boeing and Caterpillar. These upcoming reports should shed further light on the sustainability of the market’s recent advance.

    Lastly, when it comes to earnings reports, it is very important that investors realize that these reports are about what happened last quarter and are not a precursor to what may happen going forward. This is why we also want to consider the following three policy challenges. These policy issues need to be better clarified before markets can be on more sound footing. 

    Federal Reserve (Fed) Policy
    The Fed has raised rates nine times over the past two years in an effort to prevent the economy’s growth (inflation) from accelerating too quickly. As we have written before, this effort comes with the risk that the Fed can mistakenly “overshoot” their estimate of interest rate increases versus growth and turn an otherwise sound economy into a recession.

    This concern is real and is one of the reasons investors have been selling shares. Fortunately, the Fed has recently backed away from being so adamant about further rate hikes. In the short run, this has soothed investor’s fears. However, I would like to see further clarity in the Fed’s message and a willingness to reverse course if necessary. The next Fed meeting at the end of this month may provide this.

    Global Trade Policy
    Tariffs and other impediments to trade with China and other global trading partners are a negative for global and domestic growth. On this front “no news is bad news.” Economic data from China is slowing and they remain an important trading partner for the US and global economy. A trade deal that turns out to be better than earlier perceived would go a long way to alleviate investor fear and support both economic growth and global corporate profitability. We will be watching these negotiations carefully.

    Government Shut Down
    Though short-term government closures have been stock market nonevents in the past, we are now in uncharted waters. Previous government shutdowns have been measured in days while this one is now more than a month old. This has a negative effect on a number of sectors of the US economy and some of our country’s largest corporations. Investors would be wise to consider the shut down as a further risk to stock prices. As with the other policy challenges, any sign of improvement or positive outcome to this standoff would be supportive of a better stock market environment.

    Clearly, there is no shortage of bad news and challenges on the domestic and global front – for the sake of brevity, we left Brexit and US debt levels out of the discussion. At times the stock market “discounts” all of the bad news by lowering the price of shares. We are not sure that the stock market has fully priced in some of these current risks, particularly given the more recent elevated level of share prices. However, if it turns out that the recent strength is the beginning of the recovery – coupled with some clarity on the issues described above – a re-test or normal correction from these levels would be expected, allowing us an opportunity to invest at more attractive prices in the very near future.

    Keep in mind that bear markets often demonstrate periods of short term strength which are followed by declines back to the old lows or even lower. This was the case with the market rally in November that resulted in a further 10% decline in indexes. If this recent strength is just another temporary rally in the bear market – given that all major indexes still remain in long-term downtrends – I want to make sure your assets are safe. In that spirit, I continue with my recent, ongoing mantra of “better to be safe than sorry” when it comes to the bulk of your liquid net worth. Keep in mind that historically bear markets last just 6-8 months and this one is already entering its fourth month. Over the next few weeks and months I will be continuing to monitor the data points and view any pullback in stock prices as a possible re-entry point, but one that will need to be validated by better fundamentals. 

    I am excited about the prospect of re-investing in a significant global stock market recovery.


    I hope you find this update helpful.

  • Global Stock Markets Face Fork in the Road: Is the Worst Over?

    2018 can best be described by Charles Dickens who wrote, “It was the best of times, it was the worst of times. 

    Within the backdrop of strong economic data and corporate profitability, global equity markets advanced well into September, only to give back all of the gain – and then some – ending the year with all major indexes in the red.

    The media quantifies a bear market as a decline of 20% or more, and most major indexes have either surpassed that threshold or are within striking distance. For all intents and purposes, I would classify this as a bear market. The question investors should be most concerned with is: is it a gentle bear market or a more aggressive grizzly? Let’s take a look at some data points.

    As I mentioned in my last Strategy Update, the market is approaching a fork in the road and the direction it takes will be dependent on economic data. The road to the left (gentle bear) goes in a direction where we find that most of the decline in stock prices is behind us.

    This road will be full of signposts that argue the global economy will continue to grow, albeit rather slowly, and avoid a recession. These economic data points released in the coming weeks will allow me to get some verification. One of the mile markers will be stronger than expected earnings. Earnings season starts this week, so I will be paying close attention to these reports.

    Finally, a more constructive stock market environment requires significant policy expertise. This relates to a more accommodative Federal Reserve, progress in tariff negotiations and lastly, but not least important, getting our government turned back “on.”

    From my perspective, the data points on earnings and the economy are easy to judge. However, I think the market’s biggest problem is the unknown of potential policy missteps. I am hopeful economic and earnings data are supportive and that policy makers can successfully navigate these issues. If some or none of these data points yield positive results, we are more than likely going to be traveling down the other, much less forgiving, fork in the road (grizzly bear).

    In the absence of supportive economic data and/or policy success, I believe that global stocks could easily decline further. If one considers that the average bear market decline is approximately 38%, it is easy to see how much worse this could get for investors. Down this road are signposts that earnings are worse than expected and the economy is teetering on recession.

    That alone could be enough to send stocks down another leg, but combined with a policy error could really solidify the grizzly bear case. Though bear markets can be difficult, keep in mind that they are not long affairs – usually just 6-9 months – which means we may be a good way through this one. The best thing about a bear market is that when they end there are tremendous bargains to take advantage of if investors have the cash and capital to do so.

    It is impossible to know which fork in the road the market will take. Anyone who says they know for sure would be mistaken. To quote Jack Bogle, the veteran Vanguard CEO, this week in Barron’s magazine, “This is no time to take significant risk and if anything investors should reduce risk at these levels. 

    I strongly agree with Mr. Bogle.

    If at the present time the bulk of your assets are in fixed income, they will be generating better than money market return. I do not see this as a long term investment strategy, but a very good safe harbor until we get better clarity on the issues ahead of us.

    In your taxable account, you may have taken some significant capital gains from selling some of your big stock winners in recent years. These sales on balance were timely as many stocks are much lower today and now your portfolio is more defensive. However, with the gains come capital gains taxes. Keep in mind my thoughts that it is better to pay thousands in taxes, than to lose millions in market value. Your tax liability will be about one-third of the total realized capital gains, which for most amounts to about 2-3% of their total portfolio value – a small price to pay for portfolio protection.

    I wish you and your families a very Happy New Year!




    The Sustainable Endowment was written for executives and board members of small- to mid-size U.S.-based nonprofits, charities, or foundations. Running a nonprofit requires specialized knowledge and skills, especially regarding foundation management and investing your endowment so it remains sustainable for years to come.

    This book walks you through the basics and best practices of what you need to know to be successful.

    Order your copy today on Amazon

  • Happy First Anniversary To The “Unloved” Bull Market & Global Earnings Recovery

     About one year ago stock prices began their ascent from the 15 month “funk” that began in the summer of 2015. As you may recall, China’s growth slowed during that time and global corporate profits took a tumble sending global stock indexes down nearly 20% in the summer, and once again into the first quarter of 2016. It was the first time since 2008 that stock indexes were negative for more than a year, once again testing investor’s patience.
    However, since last summer, I have witnessed a powerful rally in global stock prices that rivals some of history’s best one year advances, all in the face of above average doubt and general nonacceptance from the average investor, the media and many institutional investors. Why is this market recovery so untrusted and unloved?

    I can understand why most investors questioned the viability of rising stock prices last year, given that it coincided with the surprising (to most) election of Mr. Trump. The initial rise in stock prices, referred to last fall as the “Trump Bump,” has seemed to take on a life of its own despite Trump’s inability to get anything done on Capitol Hill. Today’s doubters are understandably under invested and paying dearly for it. Years like these don’t come often. If history is a guide these doubters will eventually capitulate and embrace the steady rise in stock prices for one main reason: the recovering business cycle and increasing corporate profits support higher stock prices.

    Though the earnings recession and market decline of 2015-16 was unusually mild, it did constitute a bear market and recession in our book. This very well may be another point of confusion for the average “doubting” investor who thinks that this bull market started in 2009 and is the longest bull market in history.  The doubters need to recognize that the prior bull market ended at the 2016 low and we are at the beginning of a new business cycle and not the end of an aging one. One can simply look at the impressive and broad recovery in earnings growth across all economically sensitive sectors and almost all regions of the globe – it’s the real deal and it’s a great time for you to be a global investor.

    Lastly, I would like to point out that although Dow 22,000 sounds high, it is not overpriced relative to earnings. Moreover, foreign markets are even less expensive relative to earnings. As global corporate profits continue to advance, markets will support even higher stock prices and a higher Dow Jones Index than one might imagine. Of course, as markets continue upward the doubters will, over time, become more fully invested – which in turn will drive stock prices higher. Nothing lasts forever, but we would suggest that we are at the early stages of better times to come. The first year of business cycle recoveries typically result in big stock market gains (just like this one) and in subsequent years returns normalize in the 8-12% range, hence the importance of being involved early.

    Though I am optimistic, I do expect the normal 8-10% corrections along the way upward. Investors haven’t seen one of those in over a year and should prepare themselves for the likelihood of a return to more normal volatility. Additionally, I want you to know that within my optimistic view, I am very aware that we are dealing with the unknown and that it is a risky world. Therefore, I suggest to continue to employ my Active Risk Management tools such as having a flexible approach to your portfolio’s asset allocation, sector management and the careful placement of stop loss orders on the economically sensitive areas of your stock portfolio.  All of which can be found in my book.

    I hope you find this update helpful.

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