12/27/2012 2:00 AM ET|
A happy new year -- eventually
With all the economic woes we're facing as we roll into 2013, it may seem like the very idea of investing and winning is dead. But if you give up now, you'll miss the turnaround.
Heading into 2013, the investing landscape looks bleak. As I described last week, both stocks and corporate bonds look vulnerable to a new bear market. The economy could be tipping into a new recession. (See "Welcome to the new recession.") And, as I've described in some recent blog posts, gold and silver look vulnerable as well.
To many, it no doubt seems that the entire concept of saving, investing and building a comfortable retirement is dead. Stocks are too volatile. Bonds are overpriced, and the equity returns are too low to compensate for the risks. Gold prices are falling as the Federal Reserve's stimulus becomes ineffective. Cash doesn't pay; have you checked the returns on money market and savings accounts lately? And commodities in general are hurt by a growth slowdown and a stronger dollar.
As I've said before, the truth is that the concept of "buy-and-hold" investing is indeed dead and buried (or at least, dead for as long as anything stays dead in investing.
But we're all still responsible for funding and directing our own wealth and retirement nest eggs, which means investing. So we can't just give up; rather, we need to put in more work, not less. We need a new strategy, built on moves that ride the market's medium-term undulations and the increasingly correlated nature of markets in which groups of assets -- such as the euro and stocks -- move up and down together. I've written about my strategy for this before and will again.
But right now, and for the next few months, this strategy suggests that it's time to batten down the hatches. Here's what I see coming in 2013, and how to invest for it.
The obstacles ahead
Democrats and Republicans are at each other's throats, and far from any compromise deal on the "fiscal cliff" -- setting the stage for an even uglier battle over the U.S. Treasury's debt ceiling limit in January and February. The economy is stalling as long-term structural woes -- per-capita growth of gross domestic product, labor productivity and persistent unemployment -- remain unresolved. The credit market remains tight, limiting the pro-growth impact of all the cheap money that global central banks are pumping into the economy.
And now, with CEOs and small-business owners already nervous, consumer confidence is plunging.
The silver lining
Despite this bleak outlook, I think the new recession and bear market for stocks likely to hit us in 2013 will be short -- yet scary enough to force Washington to address its fiscal problems as well as the need for spending on the catalysts of future growth, such as our dilapidated infrastructure. There is even talk of using the Federal Reserve to fund infrastructure investments, possibly through a public-private investment partnership model.
Why? For one, there is an incredible amount of cheap money floating around in the system -- with the U.S. monetary base, the total amount of money in circulation, pushing toward $3 trillion, versus $800 billion back in 2008. Other central banks, including the European Central Bank and the Bank of England, have similarly flooded their systems. All that money acts as a lubricant for the financial system, preventing it from seizing up.
Stocks can and will still go down, but all that idle cash will dampen things a bit. Credit Suisse notes that by one measure, the money supply in the developed world is growing 6% faster than nominal GDP. That's consistent with a 10% to 15% boost in global stocks.
Also, there hasn't been a lot of overinvestment in any particular area of the economy. There is no excess fat -- such as too many condos in Miami and Las Vegas (as in the last business cycle) -- that will need to be trimmed. The corporate sector has cut its cost profile to the bone via head-count reductions and lower wages. Households have focused on paying off debt.
A turn to stocks?
And finally, stocks are attractively priced in a long-term, historical context. If bond prices are hurt over the next few months, as I expect, the valuations of stocks relative to bonds will only improve. Right now, the equity risk premium -- the extra return people are demanding to hold stocks rather than government bonds -- is roughly 6.5%, versus a historical norm of 4%. As stocks move lower, this measure will increase.
The chart below shows this visually. Looking at stocks versus corporate bonds, the earnings yield (earnings per share divided by stock price) is now just above the yield on corporate bonds for the first time since the late 1970s. That's a reflection of the fact that high-yield bonds have outperformed stocks by 57% since mid-2007. If this difference grows, stocks will be in for a boost.
There are other positives, such as the fact that corporate balance sheets are in much better shape than governments' balance sheets and that corporations are poised to benefit from the rise of middle-class consumers in China, India and elsewhere. Retail investors are also underinvested in stocks, a positive contrarian indicator.
Also, there is reason to believe that corporate profits, which keep pushing to record highs, will stay elevated for a while -- given that profit margins historically don't start falling until workers start seeing wage increases. Until the job market heals, that isn't going to happen.
How to weather the storm
But while the over-the-horizon picture is encouraging for stocks, there is a lot of muck to get through first. So while you shouldn't stop investing, you should protect yourself.
I'm recommending that my clients focus on raising cash and their exposure to the dollar while increasing allocations to Treasury bonds via exchange-traded funds such as the PowerShares DB US Dollar Index Bullish (UUP) and the iShares Barclays 20+ Year Treasury Bond (TLT) funds.
The latter might seem crazy, given that 10-Year Treasury yields are at just 1.8%. But as the Japanese experience of the past two decades tells us, rates can go even lower and stay there for longer than many expect. That would boost the price of Treasury bonds, especially as investors panic with the realization that we're in the midst of a real, sustained downturn.
But don't rest easy. Credit Suisse analysts expect that while Treasury bonds will, over time, become less likely to deliver negative returns to investors, bond sell-offs, when they occur, are likely to be severe. (Treasurys will go down when either inflation or economic growth look like it is going to improve.)
The moral of this story: There are no "safe bets" out there. Even Treasury bonds, the global reserve asset of choice, are subject to increasingly violent price volatility. Investors will need to actively manage their holdings to survive. And given the slow extinction of defined-benefit pension plans in favor of self-managed 401k's, they'll have no choice.
The good news is that after we get through the downturn I expect in 2013, there could be some clear skies and easy profits. If you stop investing now, giving up out of frustration and stuffing your savings under your mattress, you'll miss the turnaround.
And after the nightmare experience we've suffered through since the dot-com bubble peaked in 2000, with all the socioeconomic tensions that have followed, we could sure use a turnaround.
At the time of publication, Anthony Mirhaydari did not own or control shares of any fund mentioned in this column in his personal portfolio. He has recommended PowerShares DB US Dollar Index Bullish and iShares Barclays 20+ Year Treasury Bond exchange-traded funds to his money-management clients.
Be sure to check out Anthony's new money management service, Mirhaydari Capital Management, and his investment newsletter, the Edge. A free, two-week trial subscription to the newsletter has been extended to MSN Money readers. Click here to sign up. Mirhaydari can be contacted at email@example.com and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.
VIDEO ON MSN MONEY
You guys and writers on the left really need to cut back on the kool aid, listening to Lesley Gore's "Sunshine and lollipops", and get back to reality here.
THINGS ARE NOT GOING TO GET BETTER WITH NOBLABA IN OFFICE, PERIOD.
A dis-satisfied customer and voter...
I’m not convinced buy-and-hold investing is dead and buried. Perhaps buying a single equity and holding forever is—and always has been rare. The reality is that most businesses are not going to be around forever.
There has never been such a thing as a safe bet. I think the 2008 financial crises destroyed any myth that one existed. I would like to think the concept of buying low cost index funds, such as S&P 500 index funds, and holding forever is not dead and a great strategy for the average investor. It seems perfectly logical to dollar cost average and get your fair share of the stock market returns over a long period of time.
As logical as this is, it is also boring. It is much more exciting to get the emotional rush of speculating whether the broader markets will rise or fall over a given period of time.
I’ve been picking my own stocks for some time and held through the 2008 crises and the 2011 debt ceiling debacle. Over the years I’ve assembled a portfolio of 33 stocks. Regardless of all the volatility, I’m still producing respectable compound annual returns with turnover around 5% annually.
How to weather the storm? Dare I say buy-and-hold?
" ... And finally, stocks are attractively priced in a long-term, historical context. If bond prices are hurt over the next few months, as I expect, the valuations of stocks relative to bonds will only improve. Right now, the equity risk premium -- the extra return people are demanding to hold stocks rather than government bonds -- is roughly 6.5%, versus a historical norm of 4%. AS STOCKS MOVE LOWER, THIS MEASURE WILL INCREASE. "
I think Anthony means the opposite: as bonds price move lower, this measure will decrease (because the yield on bonds will increase and therefore the difference of yield between stocks and bonds will decrease), bringing back that measure closer to its historical norm of 4%.
Or the flip side, as STOCKS move HIGHER, the stocks' yield will decrease and the measure will decrease, bringing back that measure closer to its historical norm of 4%.
All of that, of course, assumes that the returns themselves will be unchanged and that earnings will stay up, which will see soon during earning season ...
Currently we are in a stagnant market, gold wil more than likely climb a little. It appears to me that the
the real estate market is now begining to recover at a steady pace. I am currently staying out of the stock market and do not plan to re-enter till I see a recovery; my advice; short the stock market if you any experience investing in this manner. I do not foresee the economy going into a recession; even with the fiscal cliff (unless it lasts several month to reach an agreement)
I welcome your point of view. I like to hear how you may be making any extra money in this economy.
Times are tough but America will overcome this situation. Some how we have to convince our government that NAFTA and the outsourcing of jobs was not a good idea. They only made other countries richer and ours poorer.
For years the PORK that has gone on EVERY bill is ridiculous (both sides) their answer was alway it's only 6 million,its only 21 million x 500 representives just about yearly forever.Just so these wastes of humans can have their name on some building? Re-Do their pension plans,force them into medicare when they turn 65 lets see how they like it. No government worker should be able to retire before the age of soc.sec. on our DIME and I don't think anything is wrong with that.
To hear the far right talk you`d think the market was dow 80% this year.Actually, it`s
up 61% with Obama.We`re making a ton of money.Things look great for the future.
Yes, we have debt.That`s now new.10 years from now, no matter who`s in the Wh
the debt will be higher and so will the Dow.Companies are sitting on a record amount
of cash and there`s plenty of cash to be put to work in the market.Enjoy the bull run.
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