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.
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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.
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