Everything good is temporary
I hate to break it to you, but the party is about to end, the so-called "everything bubble" we are in is not permanent. It will not last forever and ever.
Suppose that I, and John Hussman and others, are wrong and that in year 2030 you are still laughing at us whom been more careful this late in the cycle. By then, the cycle has lasted for 22 years, the low interest rates are permanent and maybe even lower, which has led to even higher housing prices, and households have fortunes that can be measured in trillions. Does this sound unreasonable? Well, it is.
A new day and a new all time high. It is everyday news for investors at this time. On Thursday, September 20th, S & P 500 closed at +0.8 percent, which set a new all-time high, light of technology shares. The Dow Jones Industrial Average also closed at all times high after rising one percent during the day, while the Nasdaq Composite, heavily weighted towards tech companies, also rose by close to one percent to close close levels of all time high from the end of August. Despite trade war and customs, the stock market tickes on and there seems to be nothing that can stop market optimism right now.
At the same time, Jim Caron, Morgan Stanley, says that because we see higher productivity and greater inflows of capital into shares, it should be a sign that we are not in a bubble without the growth and upturn in the market being justified, but the views go apart . Dr. John Hussman, contrary to Jim Caron, means that a bubble is exactly what we are in, or not one, but many.
Dow Jones eCom Index with Amazon, Netflix, Alphabet and Facebook, called the third largest bubble for 40 years, US tech market cap of 6 tn USD exceeds the entire Eurozone index of 5 tn USD and Facebook with 25 000 employees has a larger market cap than the entire MSCI India with a population of 1.3 billion people. Does this mean that 25,000 people at Facebook's office are more productive in total than the whole of India's population, or is this one of several symptoms of an overheated market? If you ask Jim Caron at Morgan Stanley, he would obviously mean the former while Hussman would rather see it as one of many parameters, pointing out that we are currently not only in a market with high values but also extremely high risk.
The question we need to ask ourselves now is how to allocate our capital to minimize risk exposure in our own portfolio. Even though we can certainly say that the stock market is overvalued, we can not say that it will not continue to rise further. We may, as in the article earlier, find that the haus we are currently not learning to be persistent until 2030, but it is not impossible for courses to continue to rise for one or two years to come.
How do you decide whether to follow the trend or be contrarian and prepare for another outcome? You do not. Instead, one should build a portfolio that, according to Howard Marks devis, is positioned in a way that makes preparations for several possible outcomes, not just what is most likely.
Even though I personally be a fan of asset asset allocation, it's not a strategy that suits everyone. To those who are still interested in risk diversification but may still be fully invested in equities, it is important to look for markets, industries and companies that are attractive valuation right now. Even if you do not want to allocate between asset classes, you can instead allocate between different industries.
Think about which sectors are more or less cyclically sensitive, and how the stock price tends to move in different stages of cycling. At the moment, FAANG- the technology companies Facebook, Apple, Amazon, Netflix and Google are highly valued, and if we look historically what kind of companies are most affected by recessions, it's just the tech industry. Jeffrey Gundlach explains that all recessions in the past fifty years have been followed by rising commodity prices. If you do not want to expose yourself directly to these, there are alternatives such as Exxon Mobil, Archer Daniels Midland or Barrick Gold, which allows for exposure to the stock market, but also to the raw materials that the companies themselves trade and process.
No matter how you choose to allocate your capital according to your risk profile, it is important that you have a plan. So start with that and figure the rest out.
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