Tuesday, February 6, 2018

Defensive investments to confront stock market correction

As I had anticipated on several occasions, including in this October 2017 article, the stock market is due for a major correction (I'm talking about a 40-50 % correction, not just 10 %).


This correction will affect all major markets, and all sorts of assets and commodities.

In particular, it will also lead to:
  • a deflation of the real estate bubble (in the U.S. and other countries).
  • a fall of commodity prices (in particular, gold and oil).
  • interest rates and bond yields will start to rise
  • cryptocurrencies, including Bitcoin, of course will collapse completely (their's was not only a bubble, but one of the worst manias in history). 
I had anticipated these movements both on this blog and on Twitter:

So if all assets and all major markets will suffer corrections and fall simultaneously, how can investors defend themselves?

I would say four things; which, in general, I have always said, since the founding of this blog in 2009:

  1. Diversify!
  2. Buy low, sell high!
  3. Lower debt, increase savings!
  4. Invest for the LONG TERM!
In this environment, this means to not sell in a panic (buy low, not sell low, remember?).

And also to broaden your diversification strategies.

Here are some investments you might consider (to put small percentages in each, not all your eggs in one basket - diversify, remember?).
  • Gold and other commodity ETFs (yes, I just said they will probably fall in the near to medium term, but they tend to hold up in the long term, especially in environments of higher inflation).
  • Bonds (particularly inflation-protected securities like TIPS; also high-yield bonds).
  • Consumer staples companies. 
  • "Giffen goods" or services, that is stocks in companies that do better when the economy is not doing so great (say, Walmart or fast-food restaurants).
  • Real estate, particularly through REIT Exchange Traded Funds (ETFs).
  • Broad Exchange Traded Funds (ETFs) in general are a good idea, as they enable diversification.
  • International equity ETFs, especially in countries/areas that are still expected to grow (Asia, Latin America, Africa).
  • High-dividend stock ETFs.  Even though their price might fall, they will still pay high dividends.
  • Invest in new and growing technologies.  Say, for example, renewable energy and electric vehicles, instead of coal or oil.
  • Always keep any funds you will need in the next 2-3 months in cash (and maintain a percentage of your assets in a money market or CD account; especially in times of a bear market, such as now). 
And whatever you do, DO NOT speculate with Bitcoin or any crypto-currencies.  These are worthless, you will lose your shirt.

April 8 postscript:  since January 26, the S&P 500 Index has fallen by nearly 10 %.  As I mention above, I expect it to continue falling, probably at least an additional 10-20 %.

In addition to the fact that the US stock market continues to be very overvalued by historical standards (current CAPE or Shiller PE Ratio is 31, vs a historical average of 16, http://www.multpl.com/shiller-pe/), the Trump Administration is exacerbating these trends by:
  • threatening to launch a trade war with China and others, that would lead to a global recession.
  • attacking private US companies (Amazon, Nordstrom, media companies).
  • having the least experienced economic policy team in the last half century: the chief economic adviser, Larry Kudlow, does not have a degree in Economics, and was selected mainly for his role as a TV pundit; his trade adviser, Peter Navarro, is ridiculed by the vast majority of economists for his farfetched and dangerous views on protectionism and China; and Steven Mnuchin, whose main experience was to bail out a housing lender and implement harsh foreclosure practices.
An additional factor you might consider is that we are due for a recession based on the 11-year economic cycle theory of Jevons, which has shown surprising consistency in the post-war period:


1 comment:

  1. I remain concerned about the possibility that the market will continue to sink, now accelerated by the issue of the trade war that Trump is apparently going to unleash for no good reason. The tariffs on steel and aluminum would affect mainly the manufacturing industry (automotive, household appliances, etc.) and construction. Interestingly, the effect on the construction is complex; it would probably lead to higher costs, but if at the same time interest rates go up, demand could fall, and with it eventually prices. But the supply of new housing will certainly be affected.

    Two additional buying ideas: WalMart (partly because stock prices have fallen, partly because #WMT does well when the economy in general it's not doing so well); and an ETF of companies that offer immunotherapeutic treatment for cancer, which is a sector with a great future (LONCAR, #CNCR).