We are fretting about markets again like it was 2000, 2007 or 2011. The only problem is that we don't yet know whether 2015 will end up being the start of a new equity bear market (like 2000 and 2007); or whether we might be experiencing a short and violent correction in global stocks, just like the one that happened in 2011. Here is a chart that shows you that correction for the S&P 500.
As Yogi Berra once said, "it feels like deja vu all over again". We just don't know which deja vu it is!
In 2011 U.S. stocks dropped 19-21% between May and October, only to fully recover by year end. The current U.S. stock market correction started in May 2015. Our base case is that it has yet to run its course.
2011 was not a pleasant year. Mendocino, our core model, was down for the year even though the U.S. stock market ended the year nearly flat.
Most stock markets around the world ended that year down. Here is a table of returns we published in January 2012 for 28 markets. We no longer track all 28, but we do still track the G20 nations. The G20 nations represent approximately 67% of global population, 85% of global gross domestic product, and 75% of global trade. As of September 30, 2015, fifteen of these stock markets are BELOW their 2007 highs.
NOTE: The table shows net change in price of each index during 2011. It does not take into account the reinvestment of dividends.
In the U.S. most major averages are still above their 2007 highs. However the NYSE Composite and the S&P 100 have fallen BELOW their 2007 peaks.
18 of the G20 markets are down year-to-date in 2015.
We wrote in August, "Frankly, it is pretty amazing that G20 stock markets have not done better since the market peak in 2007. Central banks in many of these countries have dumped trillions of stimulus dollars/euros/yen/yuan/pesos/etc into markets and these economies.... It is hard to make a case for a global equity bull market when so many markets are below their 2007 highs. It is even harder to make that case while watching many of these markets breaking down in real time."
It is hard to imagine that we might be rolling over into the third major bear market of the past 15 years. But the charts are starting to look like that is what is happening. We are currently seeing the same technical indicators which caused us to reduce stock holdings in 2000 and to sell all stocks in Mendocino in 2007.
We want to make sure that we bring this to the attention of all our clients and readers of Ellumination.
Many of our clients are now retired and no longer have the ability to add capital to their accounts through earnings from employment or 40lk/pension contributions.
A client who lived through the "dot.com" bust at age 50 and the 2008 financial crisis at age 58 is now 65 years old. Perspectives and priorities have changed. Frankly we have more clients concerned about market volatility now than we did in 2000, 2007 or 2011.
We have always considered ourselves to be good defensive market players. We have featured low volatility in our tactical models since 5T was founded. We have always promised Mendocino clients "market like returns with below market volatility". We feel like we have done that in spades. But during the big market dumps of 2000-2002 and 2007-2009 we were not able to prevent all losses.
We simply want to reinforce a couple of points. If you are concerned about market volatility please call us. Make an appointment to come in and review your situation with us. Let's make sure you have a complete financial plan using EMoneyAdvisor.com. Financial planning through 5T is FREE. It is all paid for through your management fee. There is no additional charge, so take advantage of the service.
4th Quarter Perspective on Stocks
September and October are often volatile down months for stocks. November and December are often two of the best months. Bulls are placing their bets that November and December will be bail out the stock market. That is still a reasonable bet.
Our current "base case" is that the S&P 500 should test the 1820 level. It may even get to the 1720-1730 area. That would be the intersection of the 200-week simple moving average and the 38.2% "Fib retracement" from the 2011 low to May 2015 high.
The last time the S&P 500 touched the 200-week simple moving average, while in a downtrend, was during the 2011 correction. The time before that was during the 2007-2009 collapse. The one before that was during the 2000-2002 collapse.
So no matter what kind of "deja vu" we experiencing in 2015 it might be reasonable to assume the 200-week simple moving average will get tested. If it does there is at least 10% more downside to this market.
The main argument against such a test is that it is already late in the year. If big institutional buyers are going to save this year by driving prices back up they have November and December to do it.
We do not see anything on the horizon that would cause a major global stock market rally in Q4 2015. In 2011 the U.S. market decoupled from global stocks and made its heroic year end saving rally alone. It wasn't joined by G20 markets. If U.S. stocks do rally in November and December we suspect they do it alone again.
4th Quarter Outlook for Bonds and Interest Rates
5T started this year believing that the Fed would not raise interest rates during 2015. We still believe that. Yesterday Christine Lagarde, Chair of the International Money Fund (IMF) appeared on CNBC and Bloomberg making the case that global growth is slowing and that the Fed should not raise rates. Today Jim Yong Kim, President of the World Bank, made similar TV appearances. He said it would be a "policy mistake" if the Fed raises rates in 2015.
We don't think long term rates are going anywhere either during Q4. When the current stock market correction was starting the 10-year U.S. Treasury yield was in the neighborhood of 2.48%. Today it is at 2.03%. Yield on the 10-year has dropped 18%. Bond prices have risen during that period--to the benefit of our clients who own bonds.
We see nothing on the horizon which would cause rates to rise significantly. If global growth is slowing as fast as Lagarde and Kim are saying then longer term rates actually have room to move down.
Looking Out Into 2016 and Beyond
We recently had an interesting meeting with representatives from Goldman Sachs. Their base case is that stocks around the world will deliver lower returns over the next 10 years than during the past 25 years.
Their expectation is for an average return just under 7% per annum, with average annual volatility of almost 15%. In other words, they are saying that investors are likely to get decent returns from stocks over the next decade, but they are going to have to endure serious ups and downs in order to capture those returns.
On the other hand they are forecasting 6% annual returns from "alternative investments" with only 5% annual volatility. If that turns out to be true "alternatives" can provide similar returns to stocks with 1/3 the volatility.
We think that could easily happen. To be more precise we think that returns from stocks could be lower than 7% per annum over the next decade. Alternative investments could provide great portfolio diversification for investors. The only problem is finding decent "alternatives" for individual investors who can't afford $1 million minimums many of the hedge funds require. Alternative investments can include hedge funds, managed futures, real estate, commodities and derivatives contracts.
During 2015 5T Wealth Partners, LP has been our best performing "model". It is actually a "fund of hedge funds" managed by 5T. Most of the current investments are alternatives to stocks.
5T is constantly on the lookout for alternative investments for our clients. We are currently conducting "due diligence" on a couple of investments that could work for our clients that do not have $1 million to put into a single investment.
We are still committed to holding high quality stocks in portfolios during 2016 and beyond, but we also want to develop larger allocations to "alternative investments".
Commodities are Alternatives to Stocks
While many market mavens believe stocks are expensive, no one believes commodities are expensive.
The $CRB commodity index is a basket of commodities. The index has been around since the mid 1950's. It has been revised several times. It is currently made up of 19 commodities: Aluminum, Cocoa, Coffee, Copper, Corn, Cotton, Crude Oil, Gold, Heating Oil, Lean Hogs, Live Cattle, Natural Gas, Nickel, Orange Juice, Silver, Soybeans, Sugar, Unleaded Gas and Wheat.
This index recently hit a low price not seen since the early 1970's. The index currently sits just above a 42 year low.
We think that it is time to start nibbling on the CRB index and/or its components by using exchange trades funds (ETF's) that track the commodities. If the CRB is going lower we are probably all in deep, deep trouble. On the other hand this looks to us like a relatively safe and objective point to enter. Commodities are "on sale" while stocks remain expensive in many cases.
If we do add commodities to any of our models we will use tight stop-loss orders to guard against them going substantially lower.
We feel that it is important for each of our clients to have a solid personal and family "financial plan" in place. We urge you to make an appointment with us to get that done. We also feel that diversification away from stocks is going to be important in 2016.
Whatever is in your portfolio, please have a solid plan in place. it is easier for us to manage expectations with you rather than for you. Besides, as Yogi Berra once said, "If you don't know where you are going, you might wind up someplace else."
When it comes to your money that is not likely to be a good place!
We will all miss Yogi (May 12, 1925-September 22, 2015).
Thanks for the fun and the memories Mr. Berra. You were the best.
Disclosure and Disclaimer - Updated last on July 23, 2012 by Paul Krsek:
ELLUMINATION is the proprietary newsletter written for clients, friends, and affiliates of 5T WEALTH MANAGEMENT .
Paul Krsek is the sole author of ELLUMINATION. While the views and representations found in the newsletter generally reflect the attitudes and opinions of the 5T WEALTH MANAGEMENT members and staff, Krsek writes without editing and therefore is solely responsible for the content and opinions contained in ELLUMINATION.
ELLUMINATION does not represent the opinions of Fidelity, Fidelity Institutional Brokerage Group, NFS or anyone employed by Fidelity in any capacity. Neither Fidelity, Fidelity Institutional Brokerage Group, nor NFS, nor anyone employed by Fidelity in any capacity has participated in the creation of ELLUMINATION and they are not responsible for the contents or distribution of ELLUMINATION.
ELLUMINATION is written to provide general information to clients, friends, and affiliates. The contents of ELLUMINATION are not to be taken as individual investment advice. No investment decisions should be made based on the opinions or information offered in ELLUMINATION.
5T WEALTH MANAGEMENT does not represent that the information in ELLUMINATION is accurate or complete and it should not be relied upon as such. Opinions expressed herein are subject to change or modification without notice.
The investment portfolio models or management services mentioned in ELLUMINATION may or may not be available in some states, and they may not be suitable for all types of investors.
5T WEALTH MANAGEMENT manages accounts with various histories and investment objectives. Various accounts may be managed differently from time to time.
Krsek makes frequent reference to the model portfolios called Hatteras, Mendocino, Point Reyes, Diamond Head, Cape Lookout and Dividend Diamonds as well as our Fund of Funds Portfolio. During 2005 Paul Krsek was appointed Chief Investment Officer of 5T WEALTH MANAGEMENT, and as such is responsible to make all trading and management decisions for all client accounts which are being managed according to a specific portfolio model. A description of each of our models can be found on our website at http://www.5twealth.com/prd_port_signup.cfm.
Not all accounts managed by 5T WEALTH MANAGEMENT are "modeled" accounts. We strongly urge our clients to understand which model, if any, are being used to manage their accounts.
From time to time 5T WEALTH MANAGEMENT receives requests from clients to purchase securities that are not included in the model portfolio to which they are assigned. Effective May 24, 2006, 5T WEALTH MANAGEMENT has encouraged clients to hold such securities in a separate account for the client. Because 5T WEALTH MANAGEMENT is a "fee only" registered investment advisor" it charges its normal management fee for monitoring such securities in the separate accounts in which they are held.
5T WEALTH MANAGEMENT makes every effort to exclude securities that are 'requested by the client' from the modeled portfolio accounts.
The investment objectives of various accounts and models may be substantially different from one another. Therefore topics or investments mentioned in E-Ellumination may or may not apply to specific managed accounts and/or models.
Trades or adjustments to accounts mentioned in ELLUMINATION may or may not happen in every account managed by portfolio managers at 5T WEALTH MANAGEMENT.
If you are not satisfied with the investment results in your account it is your responsibility to inform Krsek to discuss possible changes that can be made to the account to accommodate and satisfy your needs.
The assets held in managed accounts at 5T WEALTH MANAGEMENT may include stocks, bonds, cash, commodities, foreign exchange or mutual funds or exchange traded funds (ETF's), money market accounts or limited partnerships that represent the same. They are subject to market fluctuation and the potential for losses. The assets are not insured. The value and income produced by these investment products may fluctuate, so that an investor may get back less than they initially invested.
The portfolio managers at 5T WEALTH MANAGEMENT do not guarantee results.
Past performance should not be considered an indicator of potential future performance. If you do not consider yourself suitable, either emotionally or financially, to experience volatility and/or losses in financial markets, you should not invest.
From time to time Krsek lists the simple annual returns of the six model accounts in this newsletter. These accounts are "models" and do not represent the actual results accruing to individual accounts. Simple annual return does not represent "time weighted return" as reported individually to clients in their quarterly reports prepared using Centerpiece.
This document is for information purposes only and it should not be regarded as an offer to sell or as a solicitation of an offer to buy any securities or other instruments mentioned in it.