The economy and the stock market don’t always march hand in hand, nor do they always produce the parade-and-fireworks-worthy numbers we so deeply desire. Investors got a sharp reminder of that fact in 2018 as they got a large serving of market volatility, political upheaval, climate disasters, global economic uncertainty and so much more.
South African GDP growth and employment numbers continued to be disheartening at best as they shared the spotlight with an ugly market slide that took some previously beloved stocks into bear-market territory. Fears about inflation and trade tensions were among the culprits; so was the pervasive sense that the U.S. bull market, nearly 10 years old, can’t last much longer.
So, what will 2019 hold? We know that investors are always looking to put their money in safe and secure markets where possible profits seem more eminent than losses. Moving forward, the volatility that plagues most investment opportunities should not deter you from investing wisely and leveraging opportunities.
At Luthuli Capital, we feel there’s a high chance of the global markets entering bear territory.
This shouldn’t evoke fear. That’s not the aim of this article. Should the trend be negative in 2019, it won’t be the first or last bear market investors have had to endure. It’s a painful, yet normal, part of investing. In fact, things may even remain rosy going forward. If the global economy remains strong and companies are delivering better than expected earnings while also raising guidance, chances are that the long-term trend will remain in place, even if short term volatility can be quite painful. We’re simply looking at the data presented to us by the market and are seeing bear claws and not bull horns.
Bears don’t happen when the market is cheap. They happen when the market is expensive, when it’s overvalued. Maybe the market will find some support and rally. Maybe the market will continue its decline until the valuation of the market becomes reasonable again, even cheap.
But that’s not the point. The main idea is that even the smartest professionals with massive amounts of intellectual and financial resources fail miserably in their attempts to forecast bull and bear markets. Should we enter a global bear market, let’s look at what could cause it, what it would bring and how to prepare for it.
Global Economic Growth Is Slowing
The main bear market indicator is slowing economic growth across the globe.
The International Monetary Fund (IMF) has downgraded its growth forecast for 2019, lowering expectations for global expansion from 3.9% to 3.7%. While that decrease may seem small, it accounts for billions of dollars in lost revenue and profits for companies across the globe. According to IMF Chief Economist Maurice Obstfeld, the October 2018 downgrade reflects the increasing likelihood of a global economic downturn.
“Not only have some downside risks we identified in the last [forecast] been realized, the likelihood of further negative shocks to our growth forecast has risen,” Obstfeld warned at a conference in October 2018. However, the IMF is now saying that its latest downgrade may be too optimistic. Tightening lending rates in emerging markets, growing trade tensions, and a global stock slump over the last few months suggest that the global economic picture is deteriorating. This is driving the IMF to issue even more dire warnings.
The IMF isn’t alone in its increasingly dire forecast. Goldman Sachs projects U.S. GDP growth will slow to 1.6% in the fourth quarter of 2019. That’s a 54% drop over the next year for the world’s largest economy. It’s likely to devastate stock returns as companies tighten their belts to weather the economic fallout.
Increasing uncertainty – primarily about the impact of rising trade conflicts – points to the need for quality assets in portfolios. But building more resilient portfolios is about more than just dialing down risk, as overly defensive positioning can undermine investors’ long-term goals. As investors consider how to be prepared for the next equity bear market, asset allocation is your friend.
Asset Allocation is your Friend
As you already know, it is not wise to attempt timing the market by jumping in and out of stocks or funds, but it can be smart to make small and deliberate steps by adjusting the asset allocation of your portfolio.
Asset allocation is the greatest influencing factor in total portfolio performance, especially over long periods of time. Therefore, an investor can be just average at investment selection but good at tactical asset allocation and have greater performance, compared to the technical and fundamental investors who may be good at stock or fund selection but have poor timing with asset allocation.
Waiting to adjust the risk level of your portfolio, by re-balancing your asset allocation, is like waiting to buy insurance. You can procrastinate as long as you like but when the shit hits the fan, it’s too late. Do yourself a favour and evaluate right now whether the asset allocation, and inherit risk, of your portfolio fits with your age, near-term cash needs, proximity to retirement, and your risk tolerance.
Whilst at it, don’t be afraid to take some profits. Unload any holdings that you are not comfortable with. Hold onto good, quality stocks as they go through the bear. Nobody knows when the market will hit rock bottom, so why get rid of some quality companies? A falling stock price does not mean that the company is going out of business. There are plenty of big blue-chip stocks that have gone through previous bears and came out the other side.
No one really knows when the next bear market will happen and what the outcome will be. Do not expect to be the unique prophet who can foretell such events or rely on others who claim to be the true forecasters. Instead, act today like there could be a bear market tomorrow. Know your risk tolerance. Diversify. Employ a risk level that fits your unique situation. Re-balance. Fail to take any of these actions and you will likely wake up at some day in the future to regret it.