ICMC Believes the Current Weakness in The U.S. Equity Market Will Not Likely Develop Into a Bear Market, Yet!
By Ralph Heffelman and Leo Copanski
The equity markets have been on a rollercoaster ride in 2018, with the latest substantial dip having many wondering where we’re truly heading. Based on current trends, we believe the recent weakness is a market correction, and we don’t believe the U.S. equity market is entering bear market territory quite yet.
Historically equity Bear Markets (typically defined as declines of 20%, or more) precede economic recessions, which explains why they are generally regarded as a leading indicator. Another Important distinction of bear markets is that they seldom occur in the absence of an outlook for an impending recession.
In his famous “Two Rules of Investing”, the great Warren Buffett says:
- Rule #1 – Never Lose Money
- Rule #2 – Don’t Forget Rule #1
It sounds so simple and it makes a great soundbite, but it’s often easier said than done when it comes to your own investment portfolio.
Risk comes from many different places and takes many different forms. A few of the more common types of investing risk, include:
By Leo Copanski,
Assistant Portfolio Manager
and Investment Analyst, ICMC
Over the past 20 years, Amazon (NASDAQ: AMZN) has become a major disruptor in the retail and supply chain sectors, leading the consumer revolt away from brick-and-mortar stores to e-commerce. Today, the company is simply the go-to online resource for consumers’ needs and wants. So it comes as no surprise that some analysts are predicting uncharted growth for the retailer.
From a CNBC article earlier this month:
Following a devastating decline of nearly 50% suffered during the aptly named “Great Recession” (December 2007 through June 2009) the stock market, as measured by the S&P 500, has reached new all-time highs. The advance has become even more pronounced since the 2016 presidential election.
Given this factor alone, you’d think the world’s economies and our investment portfolios would be booming in a way that would match those milestones. But you’d be wrong.
Actually, the economic recovery following the recession has been rather subdued. Not bad, but not great either. And, apart from a recovery in housing, returns on investment grade bonds and other traditional investments have been lackluster as well for most people, at least compared to historical norms.
When people discuss alternative investments, they usually think of private equity, real estate, hedge funds and natural resources as the primary asset classes. But today we’ll look at an emerging alternative investment class—infrastructure.
The Financial Times defines infrastructure as “a basic physical structure needed for the effective operation of an economy. This can be for transport, such as roads or bridges, energy generation and delivery, water and waste management and communications to name a few.
“The funding of such projects provides investors with the asset and receipt of any income generated. The building and maintenance of a toll road is a classic example of an infrastructure investment. The investor can partial fund the project with, for example, a government and once finished will enjoy the asset and any income generated for a lease period. Infrastructure investments are similar to fixed interest securities in terms of return characteristics.”
For several years now, real estate has been one of the top-performing alternative asset classes thanks to historically low interest rates. And despite rates rising some this year, our belief, and the general industry consensus, is that real estate investments will remain a good option as long as rates don’t rise too far, too fast (which we don’t expect as of this writing).
A recent Reuters article quoted Prudential Global Investment Management (PGIM) as saying:
The outlook for real estate remains very strong, though investors will need to search to find attractive income streams and sources of growth that can deliver target returns, said the investment management arm of Prudential Financial Inc.
At the beginning of this year, there was hope that the natural resources market—particularly oil, would rebound. Oil was sitting around $54 per barrel in December, up from a low of $27 per barrel in January of 2016, and appeared poised for a rebound. But that rebound has yet to materialize.
In fact, the price of West Texas Intermediate Crude has experienced a rollercoaster ride this year, with a marked decline over the past month, down to $42 per barrel near the end of June.
A recent article on CNN Money noted this trend as well:
The interest in—and the need for—alternative investments such as opportunities in real estate, private equity, hedge funds and natural resources, continues to grow at a steady pace. And given the current state of the overvalued equity markets and an unsteady bond market, there’s good reason for the uptick in interest.
A recent research study conducted by data analyst firm Preqin, says, “The alternative assets industry is bigger than ever, with more than $7.7 trillion in hedge fund and private capital assets managed globally, having grown by $300 billion during 2016.”
The study also evaluated how institutional investors are allocating funds to alternative investments, and it serves as a good indicator of how alternatives are performing overall.
We’ve been saying for a while that in the foreseeable future it will become harder to realize good returns on traditional investments (stocks and bonds) due to an overvalued stock market and rising interest rates that negatively affect the bond market.
It looks like others in the industry are finally catching up to our thinking, as illustrated by a recent Reuters article that featured comments from prominent investment fund managers.
Top investment fund managers at the Milken Institute Global Conference this week said they had little choice but to focus on unusual and complicated corners of the financial markets as stock markets have risen and interest rates remain low.
Gray divorce, or divorce among couples aged 50+, is on the rise nationally, and according to the Pew Research Center it has doubled over the past 25 years.
In addition to the wide range of emotions that accompany any divorce, a gray divorce can lead to particularly significant financial ramifications since the couple is closer to retirement age and may not have as much time to rebuild or boost their individual wealth.