Monday, August 20, 2018

To Hold or not to hold [stocks]?

The broader stock market is moderately priced, oil and gas are dirt cheap. FAANG is in the stratosphere.  Is FAANG going to crash, dragging the rest of the market with it?  Are oil and gas taking off and taking over market leadership or is the overall market crashing first? A crash could be triggered by interest rates but… it could also be by escalating trade wars. The outlook is clear like mud.  It is like Tesla stock peaking while every production target is being missed. 

Selling all your stock and waiting for a crash may cause you to miss out on significant dividend income and price gains. Holding on and you could be hit by a significant market down turn.  I may now staunchly state that I would hold on to my stocks through a downturn.  But will I still stay that firm after losing on paper 30% or so of my portfolio value? Will I remain that valiant? 

You could have held on from the peak in oil prices until today to your oil and gas stocks; you would then still be deep in the hole.  Many sat through a large portion of 2008-2009 holding on courageously until the pain got too high and then sold at maximum loss. It is not easy to stick to such a long-term buy & hold plan while ignoring all investment pain. Yet if the strategy was adhered to, today you would have done fine – if invested into mostly U.S. stocks. As Canadians we got not rewarded so well because of the subsequent commodity price collapse. Yet again, gold prices peaked in 2011 after troughing for a short painful crash along with everything else in early 2008-2009.  If you cashed in on gold around the end of 2011 you’d now look like a genius.

So, what should one do these days?  As said, many investors are very wary and apart from FAANG, many S&P500 stocks have done nothing or very little and are relatively cheap. Here is a scenario that I like: FAANG has one final upward burst of euphoria near the end of this year. Oil and gas may be, temporarily, dragged up with it. But, after the short euphoria tech burst everything crashes in early 2019 following a one-too-many-interest-rate-hike in the U.S. It will take tech stocks a decade to recover but traditional value stocks along with oil and gas are likely to recover a lot faster.  It is possible that due to the recency fears of the not-so-recent financial crisis a lot of investors are worried but is that enough to protect us from the hype of tech stocks?  That remains to be seen.

This year we have not had much of a market while corporate earnings have been exceptional. This may warrant a good year-end rally, especially when the trade wars start fading after the U.S. November elections.  But rather than investing more, I would seriously consider taking profits during such a year-end rally and build cash.  Next year may become very nasty with several provincial governments being booted along with a possible new conservative government – the markets hate uncertainty. As if we haven’t enough noise these days!  I am far from sure that Andrew Scheer will be a stronger leader than a hopefully booted Justin, but I don’t see a lot of difference as far as stock market performance is concerned.  Strangely, I have best hopes for Canadian Banks and Energy after a short nasty dive in early 2019.  I would trim my portfolio to only stocks of the highest quality and sell by year-end anything that has gone up too far or that looks shaky in any other aspect. Basically, I am ready to run but I haven’t heard the start pistol yet.

Here are some alarms you may consider when looking for the crash: 
1.       Excessive market optimism, especially in FAANG or Nasdaq.

2.       Inverse interest rates (short term interest being higher than long term) – this is often followed by a market peak in the subsequent 6 to 12 months.

3.       When markets have fallen 15% from their previous peak get as much cash as you need for the next twelve to sixteen months by selling your worst stocks first and your ETFS which are typically the most liquid and easiest to buy and sell. For the remainder stay under cover until the we’re coming out of the trough.

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