Outlook for 2019

Happy New Year! 2018 is in the books and the recent turn in markets made it a year to forget for most investors. Q4 saw the much-expected & needed correction in US equities. While the investors seem to be breathing a sigh of relief and jumping back into the market, I am not convinced that this is the end of the correction and expect the downtrend to continue.

Here are the reasons why I continue to be bearish:

The US economy just went through 9 consecutive quarters of growth and the rate of growth is now tapering off. More importantly, most companies had record operating margins when they were hitting their respective all-time high stock prices. So, when you simply look at a short-hand financial number like P/E ratio, keep in mind that the margins are baked into the numbers — which is why you cannot base your full investment decision simply based on one number. Add to that revenue growth has plateaued for companies in this cycle and wage growth has consistently increasing month after month. Even though the Fed doesn’t see a recession coming (they never do), that recipe smells like a upcoming recession to anyone looking at the data objectively.

Tax cuts, low interest rates fueling debt binge, buybacks, record liquidity in the market, the surge of passive investing etc all provided incredible tailwind for stocks in this bull run of over 10 years. As Howard Marks said earlier in mid-2018, the stock market was “priced for perfection”. With the Fed sucking liquidity out of the market by deflating their balance sheet, investors have finally started turning to look at safety trades. Couple that with the corporate debt issues lingering, there’s not much to be excited about in the broad US equity markets.

Outlook for 2019

Normally the first place to run for safety are bonds — but with the Fed indicating that there might 1 or 2 more raises in interest rates, investors have started looking elsewhere — i.e., gold. This is the reason why I have been holding a lot of gold exposure in my portfolio, which I started building in 2016. As it turns out, Q4 2018 (& continuing into 2019) was/is great to be holding gold, grabbing some popcorn, sitting back and watching the fireworks 🙂

There is also a case to be made for a strong US$, which I couldn’t really make sense until I watched these two videos (this & this) and spent some time thinking about this model. Special thanks to Brent Johnson from Santiago Capital for sharing his brilliant take. I think it is worth re-considering the case that both US$ and gold can rise together for a while. However, if it comes to the ultimate conflict between the two (may not happen until early to mid-2020s when we have a full blown pension crisis), I will bet on the hard asset instead of a paper promise from a deep-in-the-red government with no fiscal morality.

My Focus for 2019

My gold and precious metal equities have done very well in 2018, so I intend to let the winners run and potentially look at taking some profits and/or close out some of the losing positions to reduce overall exposure in order to bring it below the 50% line-in-sand I draw for one sector.

I am also looking to increase exposure to gold bullion as I want to continue protecting my assets. While US$ holders may weather the storm better than others in next year or two, other currencies continue to see their purchasing power erode thanks to inflation. As a Canadian citizen, I want to stay hedged and protect my assets. To do this, I already maintain a healthy part of my net worth in US$ and gold. I intend to continue doing so in 2019.

With the correction in stock market, I am finally starting to get interested in some of the blue-chip dividend growth companies again. I have started evaluating some of them and starting to find that they are getting closer to fair value. I prefer having enough margin of safety, so will probably wait for them to fall a more before buying. Watch this space for monthly updates on where I am seeing more value and considering stock purchases.

With the safety trade already on, investors are rotating or already rotated into utilities, healthcare & consumer staples. So, the best deals are probably not to be found there. Most outflows have occurred in in tech, financials, energy, consumer discretionary — so, I am starting to look at these sectors to hunt for value plays.

As of Jan 1, 2019 our portfolio is diversified as shown below.

Looking for investment ideas? Check out this Top Investment Picks for 2019, where 30+ investors 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.

7 thoughts on “Outlook for 2019

  1. JC says:

    My general thoughts regarding the economy/headwinds match yours. A recession is inevitable and like you said the Fed never sees one coming. Many people are touting the low unemployment as a reason for the recession to not come, but that’s always when it shows up. I”m a bit leery of the market too after the pop to start 2019 and have raised up some cash in my brokerage account that’s ready to deploy if/when things head lower again. All the best!

    • After 9 straight quarters, and most of the raw hard data showing that we have peaked, I really dont see how we can avoid a slowdown/recession. The bounce is just a dead cat bounce imho. Only way I can see this trend reverse is with major central bank intervention/reversal of policy. If Fed suddenly decides to start cutting rates and inject liquidity into the markets, we can have the next big run of the markets. Until then, I will keep building my war chest.

      R2R

      • JC says:

        The question is then what happens to the USD if the Fed does that. I need to check out those videos that you linked to see what they have to say. The US is already running record budget deficits and that’s in a “booming economy”. Just imagine what happens when the economy does roll over, as it will, and the US govt looks to stimulate it’s way out of the recession with spending bills while tax receipts drop due to the poor economy and overall government spending rises due to unemployment/food stamps… I don’t think the Fed really has any room to work regarding interest rates. I mean if a 2.25% FFR is what breaks the economy taking them to 0% isn’t going to do much. The fact is that the system, as a whole, is still way over leveraged with debt. Time will tell though.

        • Yes, you have summarized it well there. It is a really weird dichotomy — jobs go overseas and budget deficit keeps expanding, but from a financial markets perspective, the US is the cleanest shirt in the dirty laundry — so capital flows back into US pushing up asset prices. Probably some aspect of that plays into the narrative that “the markets are not the economy”. Something to consider & ponder over.

          Yeah…check out those videos if you get a chance. Some interesting thoughts. The removal of liquidity & raise in interest rates by Fed is bullish for US$, but as you said — how long? What happens when that trend reverses?

          • JC says:

            Cleanest shirt in the dirty laundry pile is right. That’s what makes this all so interesting. It’s not just a US thing but a global debt carousel.

            Regarding the Fed removing liquidity and raising interest rates I think there’s a very fine line to that. USD continuing to strengthen is potentially a bad thing for most of the economies that are actually poised for growth. USD denominated debt from non-US companies was $11 T a year ago that gets really hard to pay back when the USD strengthens. We’ll see what happens from here but I see 3 possible scenarios playing out for the USD and only 1 is a good thing for the global economy.

            (1) USD strengthens and continues to slam EM especially hard, potentially leading to defaults that could lead to global recession although I think this would be a milder recession if it’s primarily focused in EM’s.
            (2) USD slow grind lower is probably the best case scenario and the good situation
            (3) USD drops like a rock due to US debt fears probably global recession would happen here too.

            We’ll see what happens.

Leave a Reply

Your email address will not be published. Required fields are marked *