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What's the current market volatility signalling?
Wednesday, November 14, 2018, 7:11 PM

Given the recent volatile gyrations of the markets, we thought it an opportune time ask a full-time financial advisory firm whom we respect for their take on the current environment.

As most PeakProsperity.com readers are aware, we highly advise investors to work in concert with a professional financial advisor whose strategy takes into account the "Three E" macro risks highlighted in our foundational series, The Crash Course.

If folks experience difficulty finding such a professional, we refer them to Peak Prosperity's endorsed financial advisor: New Harbor Financial. The folks at New Harbor have been mindful of our analysis -- as well as that of other experts we admire, such as John Hussman -- for over a decade now.

We aked them for their latest evaluation of the current situation in the markets, how they're positioned right now, and what guidance they're offering to their clients.

Here's what they have to say:

Environment

Risk in global stock markets is exceedingly high at the present time in our opinion. Much of the work that we do in evaluating risk levels in the stock market at any given time is derived from valuations, and other key market metrics like stock market breadth, sentiment, and technicals.  Valuations, measured the way that we think they should be, have never been higher. Both the cyclically adjusted price earnings (CAPE) ratio developed by Robert Shiller, and the margin-adjusted CAPE, as developed by John Hussman, are at or near historic extremes.  Valuations cannot be used to precisely time the short-term movements of stock indices, but over the long-term of 5 to 10 years or more, valuations have a very high correlation to actual realized returns over those timeframes.  At present valuations, we expect negative annual returns over the next five to ten years or so.  Of course, we can’t predict the path of those returns, and these return forecasts could be realized by a rapid stock market crash or a slow drip lower in equity prices year after year. Either way, we don’t recommend having much stock market exposure at present, and believe one should seek safety and modest returns in cash equivalents while waiting for a better opportunity.

Highlights of recent portfolio activity

Because of our robust defensive posture, approximately two-thirds of our portfolio is invested in short-term treasury bills or equivalents. For our typical client, we have less than 10% net exposure to the stock market.  Our largest exposure to market risk comes from our position of about 12 to 18% in precious metals and precious metal mining shares, the latter of which we have hedged to protect against further downside.  We also have hedged exposure to emerging markets equities to the tune of about 10%, favoring this class as they have what we believe are much more compelling valuations than the US and most other stock markets.   This long exposure is further offset with a 5%-10% short/inverse position in the US stock market.  We recently took a profit in an exchange traded fund that tracks oil and gas production companies.  We sold this group because of the breakdown in the broad stock market a few weeks ago, and because the oil and gas sector violated some short-term technical zones that we monitor, in no small part due to the recent sizable pullback in crude oil prices. Overall we achieved a greater than 10% return in that position over about a year’s time.

Performance

We have been preemptively defensive over the last several years in the face of historically reliable data that has suggested very little durable upside potential with significant negative downside risk.  As a result, we have lagged the market over the last several years.  However, our own experience is that a defensive position needs to be established before a change in market character is apparent to the masses, as history shows that sudden elevator drops in the market can and often do happen from the set of conditions we presently observe.

Because of our current defensive posture, client portfolios will tend to outperform in down markets.  For example, since the S&P 500 high on September 21, 2018, our portfolio return was -0.3% on average for clients, versus the S&P 500 return of -6.8%.

Current Outlook

The character of the market changed early this year, when in January the S&P 500 dropped around 10% in a matter of days. The rebound from those lows stretched for many months, and lasted longer than we expected – straight into September.  It seemed like the “buy the dip” mentality would prevail yet again. In fact, the S&P 500 made a new marginal high on September 21st, though only by about 2% or so versus the previous high in January. The S&P 500 then dropped by 10% or so again over a couple weeks in October, yet this barely budged market valuations off their all-time extreme highs.  Last week we saw a furious rally, but then over the last several days the bounce has failed.  This type of behavior is different than what we’ve seen over the last several years.  For a change, it seems like the market is walking up an ice mountain, slipping backward two steps for every step it moves up.

We urge investors, especially those that are not our clients, to dramatically reduce risk in the stock market if they have not already done so.  Our recommendation is to reduce equity exposure to as low as is comfortable, but below 30% is ideal in our view.  It is easy to overestimate one’s ability to time their shift to a risk-off posture, and if having failed to do so, sit through a long, multiyear drawdown.

We would be happy to offer a free portfolio review at any time, with an eye to helping to dramatically reduce stock market exposure for those accounts that are over exposed.

Important Disclosures: New Harbor Financial Group, LLC registered as an investment adviser directly with the SEC in January 2011.  The firm only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements.  SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the adviser has attained a particular level of skill or ability. Information presented is not an offer to buy or sell, or a solicitation of any offer to buy or sell the securities mentioned.  The content of this article does not involve the rendering of personalized investment advice.  No current or prospective client should assume that the future performance of any specific investment or strategy will be profitable or equal to past performance levels.  All investment strategies have the potential for profit or loss.  Changes in investment strategies, contributions or withdrawals, and economic conditions may materially alter the performance of your portfolio.  Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for a client’s investment portfolio.  Historical performance results for investment-management fee, the incurrence of which would have the effect of decreasing historical performance results. There can be no assurances that a portfolio will match or outperform any particular benchmark.  The results portrayed reflect the reinvestment of dividends and capital gains.  Performance is shown for a composite of accounts managed by New Harbor with balances of $250,000 or greater.

Beyond the high degree of overlap between their outlook and ours, we're pleased to see New Harbor's focus on risk management remains validated by their relative outperformance vs the major indices (S&P, Dow, NASDAQ, Russell, etc) during the recent market downdraft. Their heavy focus on 'preservation of capital' is a major reason why we endorse them.

If you're interested in learing more about New Harbor, talking with them, and/or receiving a (completely free) portfolio crash-test consultation, just click here.

But whether you work with New Harbor, another financial professional, or do-it-all-yourself, we think it wise to prepare your portfolio for a rocky 2019. Reduce your risk exposure, and draw up contingency plans for a multiyear drawdown.

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5 Comments

VeganDB12's picture
VeganDB12
Status: Platinum Member (Offline)
Joined: Jul 18 2008
Posts: 757
Great group of people

I highly recommend them. Honest, professional and helpful. No pressure. A stark contrast to an earlier potential advisor who screamed at me when I said I wanted to manage most of my own money in index funds.  Did this in front of all of his staff and other clients in the waiting room LOL.  Takes all kinds I guess. 

asgordon123's picture
asgordon123
Status: Member (Offline)
Joined: Aug 5 2018
Posts: 13
CASH IS KING....

cash gives you the flexibility to make opportunistic investments during crisis.  there will be many.  I have a contrarian view on US rates....Go long US treasuries as interest rates start to MOVE DOWN as we cascade into the next global recession and investors flock to the USDollar and treasuries as the safe haven trade of the century.  Of course the US fiat dollar is a ponzi scheme of enormous preportions....but that all comes into play later.

cmartenson's picture
cmartenson
Status: Diamond Member (Online)
Joined: Jun 7 2007
Posts: 5979
My model is...
asgordon123 wrote:

cash gives you the flexibility to make opportunistic investments during crisis.  there will be many.  I have a contrarian view on US rates....Go long US treasuries as interest rates start to MOVE DOWN as we cascade into the next global recession and investors flock to the USDollar and treasuries as the safe haven trade of the century.  Of course the US fiat dollar is a ponzi scheme of enormous preportions....but that all comes into play later.

I call the US dollar the "roach motel" of fiat money.  For many reasons, a lot of them simply contractual, speculative investment money will flood back into the US dollar at the end of the cycle.

But that's where it will remain, trapped and poisoned.  

Like every fiat currency, the US dollar is ultimately backed by the "full faith and credit" of the US government and its citizens.  

You know, the same ones that are on the hook for this:

Two questions have to be asked:

1) Who's going to eat the losses ... and ...

2) What sort of faith can one have in a system that has extended that much credit?

If something cannot be paid back, then it won't be.  The dollar is actually "backed" by the assets and liabilities of the US.  It needs to be pointed out, although it really shouldn't have to be, that ever since the great credit experiment began ~1980 that the IOUs have been growing at a much faster pace than GDP.

When your liabilities grow faster than your income, eventually you run into trouble.  That trouble crashed ashore in 2000, but sadly Greenspan doubled down.  Then it crashed ashore in 2008 but horrifyingly Bernanke tripled down. 

It will tsunami ashore at some point in the (near?) future and then Powell (or whoever is in there) will quadruple down.  

That's when the roach motel truly opens for business, accepting all comers.

asgordon123's picture
asgordon123
Status: Member (Offline)
Joined: Aug 5 2018
Posts: 13
A matter of timing.

thanks chris for the detailed reply.  totally on board with your model.  i think the difference here is a matter of timing.

 

rob@2disc.com's picture
Status: Member (Offline)
Joined: Apr 4 2008
Posts: 9
I met and Like New Harbor Financial

I emailed with then met the good people at New Harbor Financial, as I must figure out what to do with a bunch of mostly cash now. Imagine this: they are honest. No hidden fees and clear about their strategy. Firms committed to the idea that fiat currency plus huge debt will soon destroy retirement wealth have had a tough time in the last few years, but the probabilites are high that they will beat the market substantially over the next 10+ years. At the very least, it makes sense to have at least 50% of one's investments with such a firm. As always, so much depends on how long Fed money printing and reduction of interest rates--in large part to enable paying interest while paying down principle matters little if at all--will keep stocks lofted. If this time is indeed different in that (1) the cost of money can be kept near zero when needed and (2) fast data processing enables the Fed to maintain Friedman's MV=PT (Money supply x Velocity = Price x Trade), then stocks can be lofted for years or decades. If I recall correctly New Harbor pointed out that leverage or margin can make sudden shocks too deep for the fed to manage This accords with the credit supercycle model of crashes, and my gut tells me that that model means, yes, bet on big declines. 

One big bias in most finacial advisor firms is that, by keeping clients near fully invested in vehicles that will fall, their clients feel locked in so as not to realize losses. Also, such firms don't want clients in much cash (or near equivalents) because then clients could buy a house or gold or something that reduces the firm's revenue coming from percetage-based fees.

~Rob Laporte

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