“So much is going wrong all at once,” was the assessment by TrendMacro’s Chief Investment Officer Donald Luskin in a recent research note.
Mike Wilson of Morgan Stanley struck an equally pessimistic tone in his note to clients: “We are in a bear market.”
“While 2018 is clearly not a year of recession, the market is speaking loudly that bad news is coming.”
Some of it has already arrived.
U.S. stocks, led by technology companies, slipped again on Monday in a move that wiped out November index gains. FAANG stocks (Facebook, Amazon, Apple, Netflix and Google (Alphabet)) were hit hardest. In recent months, the quintet of technology companies has lost a combined total of roughly $927 billion relative to the individual 52-week highs — a market cap evaporation approximately equal to Apple’s current value.
Although the sharpest pain was felt in technology, most other sectors joined in the pullback with only real estate and utilities barely avoiding losses.
“[We] think the US/China trade war is at the existential center,” wrote Luskin. Yet despite cautious and at times conflicting language from the White House, Luskin remains optimistic that the prospects for a trade deal are improving. In his view, the recent developments indicate the policy process is “reaching its most productive state.”
Nevertheless, investors hoping for an end-of-year rally are quickly running out of time. To make matters worse, the outlook for 2019 is far from promising.
Of all the market risks, author and investor Jim Rogers is most concerned about Washington, DC: “That’s where the greatest risks are.”
“First of all, we have a central bank that has no clue what it’s been doing and, probably, what it will do in the future. We certainly have an executive, and legislative, branch that has no clue about what they’re doing,” he explained to Remy Blaire in a recent Sprott Media interview.
“When things go wrong, they’re going to make more mistakes. Be careful.”
With interest rates still expected to rise, many investors lack confidence in the bond market. At the same time the absolute level of rates, though higher than before, discourages an outright move to cash.
Real estate, a popular alternative, has fared well in recent years. Yet as interest rates rise, particularly on the popular 30-year fixed mortgage, demand suffers — a trend reflected by the recent drop in homebuilder confidence.
Emerging markets provide yet another possibility, albeit a volatile one. The group, which has struggled this year, has outperformed U.S. stocks in recent weeks. The MSCI index of emerging market shares gained 0.5% on the session led by Chinese stocks.
Even Bitcoin, which began its historic run following last Thanksgiving, has offered no relief. The world’s largest and most well-known cryptocurrency shot above $19,000 before returning the entire gain plus an additional 30%. It now sits below $5,000, its lowest level in more than a year. The sharp reversal has been damaging to both crypto-speculators and the technology companies, particularly the semiconductor companies, that helped fuel the adoption.
For speculative opportunities, Rogers suggests looking abroad.
“Just like your parents taught you, buy low and sell high. China’s down 60% from its all-time high. Japan’s down 50% — I’m not buying Japan. I don’t own Japan. Russia is hated — I own Russian shares; I own Russian bonds; I own the currency.”
“There are places that are down, and down a lot. And if your mother was right, these are the places you should be looking.”
In particular, Rogers has been looking to Zimbabwe for opportunity.
“Zimbabwe’s a disaster. A man, in 1980, took over and became a dictator pretty quickly thereafter and proceeded to ruin the country for the next 37 years.”
Now, things are set to change.
“They threw him out last year and I know things are going to change. They may get worse, but I would suspect Zimbabwe is now an interesting place to look.”
Nevertheless, Rogers recommends caution.
“If you can’t find Zimbabwe on a map, if you don’t know where Ghana is, please do not invest in either of those countries. Only invest in what you, yourself, know a lot about. If you don’t know that Ghana has a lot of cocoa and a lot of gold, please don’t pay attention.”
It’s true. These opportunities aren’t for everyone.
Steve Todoruk, an investment executive at Sprott, would rather pass. Nonetheless, he agrees there are some interesting opportunities in West Africa, particularly in the Republic of Mali.
“For very special gold deposits in Mali, I’m prepared to take a certain amount of political risk, but the deposit has to be extra special.”
TIME FOR COMMODITIES
The general underperformance of commodities relative to stocks may signal a speculative opportunity.
“Sugar, believe it or not, is down something like 80% from its all-time high. [T]here’s not much in the world, in life, that’s down 80% over the past 40 years,” said Rogers.
Regarding oil and the possibility of OPEC action, Rogers added,
“I have learned not to pay too much attention to [OPEC] … if you’re going to figure out the price of oil.”
“Oil is making a complicated bottom. We’re going to look back one day and say, ‘2015, ‘16, ‘17, ‘18, ‘19 oil made its bottom and it went up again.’ … So be careful, don’t sell your oil.”
Gold, the historical alternative, has been surprisingly quiet given the stock market volatility. Gaffney believes dollar strength and rate hiking cycle are primarily responsible.
“Investors really haven’t moved back in to the precious metals as a safe haven. We did expect to see some of that buying occur as this volatility has hit the markets. But there are a number of factors that continue to weigh on the price of gold, mainly a stronger U.S. dollar and interest rate expectations … we do expect the Fed to continue raising rates.”
So, is it time to buy commodities? Rogers believes it is.
“It is the time to buy commodities again. I would say to you, write it down — commodities are going to do better than stocks.”
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