During the last several months I have been cautious with equity markets. My observations are based on some technical indicators and my beliefs in the fundamental data from all over the globe. I have gone into great lengths in past issues to express the reasons for my concerns and I will not go into those at this time. Certainly all those reasons continue to be valid in my mind. However the bigger force at play today the US Federal Reserve “The Fed” has continued to provide liquidity to the system and this has in turn caused money to flow into the US Equity market because of the growing belief that “there is no alternative”. This has caused interest sensitive issues like Utilities and REITS to have spectacular runs over the past couple of years to points where they are “priced to perfection”. There is also a growing belief that markets will undergo a correction in an ongoing Bull Market. There seem to be very few of us who believe that we could start a new Bear Market any time soon. There is also the desire of individuals like myself to be right and when we are wrong like I have been (in the short term), we tend to keep grasping at reasons why we are right. Worse yet, we are afraid that if we change our mind and get bullish, we will do it at exactly the wrong time just before the market turns down. We all know that when the news is really bad and markets have fallen substantially we should be looking for a bottom. But we never know how low the markets can fall as we try to “catch a falling knife”. Conversely, we all know that when the news is good and the markets have risen substantially, we should be selling. Again, we never know how high the markets can go.
In these pages we can see reasons to buy and reasons to sell. We need to make up our own minds on what we believe is going to happen and act accordingly. That is why I say that you must be prepared for a possible 50% decline in the market and be ready to take advantage of that. Asset Allocation is the best way to do this. Never be fully invested - Especially now. Have Income Assets and Cash Assets available to purchase more when stocks are down. Just ask people who have bought gold stocks or small caps in Canada in the last few years. The S&P TSX Venture index is down 62% since its high in 2011 and 73% since its high in 2007. So yes, while the S&P 500 has marched on to new highs, there are many indexes around the world that have had tremendous declines. That is why we diversify, that is why we use Asset Allocation. We will always buy into weakness and sell into strength. The best money managers in the world keep their positions in line with rules.
What do you do now? Make sure you know the rules we have helped you set and make sure you follow those rules when emotion takes charge of your decisions. Be prepared for outliers in market action and use all those times as opportunities to create more wealth. There will be more outliers on the upside and there will be more outliers on the downside ahead of us. Some of us can predict some of these outcomes but the only sure way to “Protect and Grow” your wealth is with rules based “Asset Allocation”.
** I have prepared this commentary to give you my thoughts on various investment alternatives and considerations which may be relevant to your portfolio. This commentary reflects my opinions alone, and may not reflect the views of National Bank Financial Group. In expressing these opinions, I bring my best judgment and professional experience from the perspective of someone who surveys a broad range of investments. Therefore, this report should be viewed as a reflection of my informed opinions rather than analyses produced by the Research Department of National Bank Financial **