October turned out to be one scary month for a lot of investors. Most portfolios took a haircut with the broad market taking a plunge. Almost half of the S&P 500 stocks are in bear market territory now, having fallen more than 20%. I am now waiting for the other shoe to drop. When you have a handful of stocks (the big 5 tech stocks) making more than 15% of world’s largest financial market, nothing good can come from it. I’ve been highlighting this for the last year or so and finally the tide is turning with the major tech stocks plunging in October.
But these are just the effects of overall liquidity change in the global financial system. As Stanley Druckenmiller says:
“Earnings don’t move the overall market; it’s the Federal Reserve Board… focus on the central banks and focus on the movement of liquidity… most people in the market are looking for earnings and conventional measures. It’s liquidity that moves markets.”
We are about to get a lesson in real-time over the next few months, and October was just the beginning of this phenomenon. The following chart from Incrementum illustrates this point succinctly. The coordinated global growth that the world got used to, will become a coordinated global slowdown.
Outlook for November 2018
Things are finally turning interesting in the markets for me. Last few months have been pretty boring as most companies were overvalued and I was sitting on the sidelines with a defensive position (lots of gold exposure) and some cash on hand. When the liquidity crunch arrives, this cash will come in handy for me to pick up some good long term plays that I have my eye on. I don’t have a definitive shortlist yet, and will be starting to look again in the dividend growth stocks space for investments as the valuations come back down to earth.
Meanwhile, I am happy to play the waiting game with my gold & precious metals exposure in my portfolio and continue building up my cash position.
As of Oct-31-2018, our overall portfolio diversification is structured as shown below.
Looking for investment ideas? Check out this Top Investment Picks for 2018, where 35+ bloggers present their top pick and a reason to invest in those securities.
What are your thoughts on the points mentioned above? Do you have any specific thoughts on the markets and looking at anything interesting? Share with a comment below.
Full Disclosure: Our full list of holdings is available here.