Shaun Scott No Comments

Catalysts, Signs and Strategies for the Coming Bear Market Bottom

I recall while ascending the Disappointment Cleaver Route of Mt. Ranier in 2009, our rope team traversing a glacier heavily littered with boulders of all sizes. A picture of that slope was etched into my visual memory, a sign of treachery so convincing no verbal warning was required of the guides. What are the signs of a near-term bear market bottom, what catalysts may invoke these signs, and what bear market principles can guide you safely and profitably through such a perilous course?

On that side of the mountain, there was simply no way to the top of Ranier but across that terrifying, boulder-infested glacier. Likewise, major bear markets, like the one we’ve experienced throughout 2022, simply don’t end without one of two indicators triggering: either 1) the Fed reverses course and starts lowering interest rates, or 2) broad capitulation takes place in the stock market, or both. Jerome Powell has been clear about what will cause the Fed to reverse course: either a) financial crisis, or b) a fall in inflation near the Fed’s desired 2% level (likely accompanied by severe economic contraction). Broad stock market capitulation is driven by a lengthy and discouraging downtrend in stock prices (the traditional third and final stage of a bear market).

Rather than cower at the edge of the glacier until we freeze to death, let’s consider the navigational principles for investing through times of high inflation, recession, financial crisis, and falling stock prices.

  • Present high inflation requires a high value be placed on present income, and that future growth be scrutinized ruthlessly. If you’re high on the “hopium” of an early Fed pivot, and still sitting on a portfolio full of growth stocks, maximum pain likely lies ahead for you.

  • Build a watch list of great businesses, the ridiculous price at which you must own them, and set the alarm clock for when it happens.

  • Build investable cash. If you can’t take advantage of a great investment opportunity, it won’t benefit you. Get frugal, cut expenses, and reduce positions vulnerable to said conditions. If you don’t put food in your pack, you’re not going to the summit!

  • Buy great businesses when you find them at a reasonable price, but don’t meaningfully increase stock exposure until the bottom is confirmed. Many climbers made a summit attempt the day before they should have, never returning home as a result. Don’t jump the gun trying to time the bottom with a hunch, or the market will set you up, call your bluff, and eat your lunch.

  • Never sell merely to reduce emotional stress. Capitulating near a bear market bottom is a catastrophic error. Don’t get buried on the mountain!

Realize in the case of a Fed pivot, stocks have historically bottomed at significant new lows months after the Fed reverses course, and in the case of broad capitulation, a bottom comes quite swiftly once the selling exhausts itself. Remember that history rhymes, but it doesn’t exactly repeat. The bottom could be confirmed at any time. As an investor, you operate in the realm of probabilities, not assurances. Remain vigilant and nimble, ready to act decisively and courageously whenever that rare investing signal flashes; do not waver when the summit is in full view, and the conditions beg of you to attain it!     

Think about it, and a blessed and happy New Year to you and yours. Shaun

 

“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” ~Warren Buffet

“What has been is what will be, and what has been done is what will be done, and there is nothing new under the sun.” ~Ecclesiastes 1:9

 

The opinions voiced in this material are general, are not intended to provide specific recommendations, and do not necessarily reflect the views of LPL Financial. The economic forecasts set forth in this commentary may not develop as predicted.

All investing involves risk including the possible loss of principle. No strategy assures success or protects against loss.

 

 

     

  

https://www.fivestarprofessional.com/spotlights/90982

Award based on 10 objective criteria associated with providing quality services to clients such as credentials, experience, and assets under management among other factors. Wealth managers do not pay a fee to be considered or placed on the final list of 2012/2022 Five Star Wealth Managers.

Shaun Scott No Comments

Opportunities Lurk as Bear Regains Dominance

The White Mountains of New Hampshire are small, but extremely dangerous mountains, especially in the winter season. Climbers visiting from the world’s taller, drier, and in most cases smoother ranges, often expecting a mini-version of their past climbing experiences, are rather presented with endless rugged bouldering, cold but wet, hypo-thermically-conducive air, and the fiercest winds on earth. New Hampshire’s tiny range is especially equipped to brutalize climbers, introducing a few to their Maker almost every year. The financial markets are equally formidable, identified by savvy investors as “an organism designed to ultimately inflict the maximum amount of pain on the largest number of investors possible”. How might this truth present shrewd contrarians with exceptional opportunities, and where is this phenomenon relevant right now?

Buying a great business at a reasonable price and holding it for a lifetime is probably the surest, and one of the most efficient ways to build wealth. Every other investment is a trade in which one expects to sell their holding in the future to another investor for a higher price. While there are many trading principles which can increase the probability of success, like valuation guidelines, proper position-sizing, and stop-loss orders, the single biggest factor, and, therefore, opportunity, is to buy aggressively when prices are severely depressed, sentiment is at historic lows, and most investors think the sky is about to fall. Investors who possess the courage and good sense to commit their hard-earned capital to quality holdings when there is blood in the streets are often presented with above average returns. What markets seem poised to present such an opportunity in the near future?

  • Emerging markets equity prices generally move inversely to the U.S. dollar, which hit a 20 year high in September and is now collapsing. The iShares MSCI Emerging Markets ETF (EEM) broke through its year-long downtrend less than 30 days later,1 and seems poised to appear on Steve Sjuggerud’s “cheap, hated, and in an uptrend” radar device. Keep a tight leash on this one, as a global recession nears, especially punishing to this asset class.

  • Cash-gushing U.S. businesses, in particular beaten-down small and midcap stocks, especially those with pricing power, are in high demand AND in cases selling for the lowest valuation in years. Be careful to distinguish a “Forever Stock” purchase from a trade, and be disciplined to establish an exit plan for all trades at the time of purchase. Volatility will likely extend her stay, for so plans High Inflation.

  • Not long ago bonds were referred to by the shrewd as an investment offering ‘return free risk’. Today, following their worst year in a century, and given a high probability ‘the Fed’ will be forced to stop raising, and maybe even start cutting interest rates in 2023 by an impending global recession, improves the outlook for bonds considerably. Steer clear of “junk (high yielding corporate) bonds”, as the recession will harshly scrutinize them, and consider instead the longer-end of the high-quality market.

  • If you can imagine ‘the Fed’ having to stop raising interest rates, and possibly even having to cut rates and print money, while inflation is still two to three times its desired 2%, and this dynamic occurring while a global supply-chain restructuring unfolds, you can begin to imagine how expensive natural resources might become. Prefer domestic producers, established leaders, and especially royalty companies with strong income streams and capital efficiency. Build your positions in tranches, diversify, and honor your risk tolerance. Have an exit plan or it will have you. No boom lasts forever.

Think about it. Shaun   

 

“Give a portion to seven, or even to eight, for you know not what disaster may happen on earth.” ~Ecclesiastes 11:2

“Be wise as serpents and innocent as doves.” ~Matthew 10:16

 

1 YAHOO Finance, “Quote Lookup: EEM”, December 9, 2022

https://finance.yahoo.com/quote/EEM?p=EEM&.tsrc=fin-srch

 

The opinions voiced in this material are general, are not intended to provide specific recommendations, and do not necessarily reflect the views of LPL Financial. The economic forecasts set forth in this commentary may not develop as predicted.

All investing involves risk including the possible loss of principle. No strategy assures success or protects against loss.

Asset allocation does not ensure a profit or protect against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

 

 

     

  

https://www.fivestarprofessional.com/spotlights/90982

Award based on 10 objective criteria associated with providing quality services to clients such as credentials, experience, and assets under management among other factors. Wealth managers do not pay a fee to be considered or placed on the final list of 2012/2022 Five Star Wealth Managers.

Shaun Scott No Comments

Two Investing Strategies for 2023 and Beyond

Mountaineers venturing above treeline in winter carry essentials to thrive in any weather scenario, and sometimes experience every weather scenario in a single day. Investors who prospered in the 1970’s, a decade which saw two lengthy recessions, wild market volatility, and constantly rising interest rates, were comparably equipped! 2022 ushered in conditions substantially similar to the 1970’s, and following similar policy errors, making the roadmap of the 70’s a valuable commodity to us today. What two particular investment strategies can tame a long period of erratic stock market volatility while dramatically improving investment returns?

A ‘Forever Stock’ represents ownership in a business of such high quality that, apart from a fundamental change in the company or industry, should never be sold so long as it was acquired for a reasonable price (or better!). Forever stocks are always capital-efficient businesses with a strong brand and significant free cash flow, and generally become industry dominators. They are also generally dividend-paying, and frequently dividend-increasing companies, sometimes referred to as “Dividend Aristocrats”. The stock averages showed some of the worst returns in history in the 1970’s, but investors who owned ‘Forever Stocks’, and reinvested dividends when applicable, fared far better. I use a set of five strict valuation parameters for the 31 ‘Forever Stocks’ I track, but you can create your own list and set of parameters, just make sure they’re tested. A mountaineer who doesn’t test equipment near home is in for the occasional rude awakening, or worse. ‘Forever Stocks’ seldom go on sale, but when they do, BUY THEM, regardless of your macro-outlook, and check your numbers frequently so you don’t miss “buy zone” opportunities.   

It’s common knowledge on Wall Street that asset allocation, not security selection, is most responsible for investment returns. Investors widely exposed to energy, healthcare, and consumer durables this year have enjoyed massive relative outperformance, while those exposed to information technology, real estate, and consumer discretionary have suffered large losses. Diversification is an important principle not to be violated, but focusing on industries in favor, and avoiding industries out of favor, and until the trends have run their respective courses, can both smooth out the ride and radically improve your investment returns. I climb in the High Sierra’s often because the conditions are ideal, and I avoid the Rocky Mountains because both the snow and rock are unstable. The same principle can be applied to investing, and the market environment that appears to be entrenched for the coming decade offers ideal conditions to apply it. Remember, the trend is your friend, and what is in motion tends to stay in motion (and in the same direction). This is not market timing or day trading, both highly speculative endeavors, it is trend following by industry groups. Be acquainted with the 21 Key Industry Groups, and again, make sure your parameters for industry selection and avoidance are proven.

Think about it. Shaun   

 

“There is wisdom in the abundance of counselors” ~Proverbs 11:14

“Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.” ~Warren Buffet

 

The opinions voiced in this material are general, are not intended to provide specific recommendations, and do not necessarily reflect the views of LPL Financial. The economic forecasts set forth in this commentary may not develop as predicted.

All investing involves risk including the possible loss of principle. No strategy assures success or protects against loss.

Dividend payments are not guaranteed and may be reduced or eliminated at any time by the company.

Asset allocation does not ensure a profit or protect against a loss.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio.  Diversification does not protect against market risk.

 

 

     

  

https://www.fivestarprofessional.com/spotlights/90982

Award based on 10 objective criteria associated with providing quality services to clients such as credentials, experience, and assets under management among other factors. Wealth managers do not pay a fee to be considered or placed on the final list of 2012/2022 Five Star Wealth Managers.