This is a challenging time to be an investor, with ample evidence for both “bull” and “bear” arguments. You need a guide for the right call
“Do I sell now and lock in my profits? Or do I stay in the market for 2020?”
That’s the number-one question on many investors’ minds right now.
While investing never comes with a crystal ball, predicting market direction feels especially challenging today. After all, whether you’re a bull or bear, our current market offers ample evidence to validate your position — whatever it is.
On the bearish side, there’s a chorus of voices preaching doom and gloom.
Take the recent warning from the CEO of $150 billion DoubleLine Capital, Jeffrey Gundlach, also known as the “Bond King.”
The U.S. stock market “will get crushed” when the next recession comes, he just said.
For any Digest readers less familiar with Gundlach, he one of the few investors who saw trouble in the subprime market, leading up to 2008’s credit crisis. It was back in June 2007 that he said subprime “is a total, unmitigated disaster, and it’s only going to get worse.”
So, what exactly is Gundlach seeing now?
The U.S. is “battling tooth and nail the next recession,” he recently said in an interview. “The Fed has done, and the central banks, everything they can to avert the next recession. But a recession will come.”
So, what’s his advice to investors?
Defense.
From Gundlach:
You probably should’ve started playing defense in 2018. And the fact that 2019 has been really good is just a better reason to play defense.
Gundlach isn’t the only prominent investor nervous about 2020.
Earlier this fall, hedge fund billionaire Ray Dalio said the global economy is in a “great sag.” He went so far as saying the world today has parallels to the 1930s.
From Dalio:
This is the best we are going to get, this moment. The cycle is not going to continue forever.
Now, Dalio isn’t expecting a sudden crash. What he’s seeing is the aforementioned “great sag.”
Like Gundlach, Dalio called out central banks, saying there was little they could do in terms of monetary policy to stop a coming downturn. They simply have less room to maneuver now.
Overall, the bearish camp points toward several concerns: weak corporate earnings, the trade war with China, new trade wars with Europe, uncertainty around the 2020 presidential election, Trump’s impeachment, slowing global growth, weakness in Europe, the growing wealth gap around the world (and the related social unrest), weakness in recent U.S manufacturing reports, and an aging bull market that simply can’t go on forever.
***But if you’re in the bullish camp, there’s also data to support optimism
Just yesterday, Treasury Secretary Steven Mnuchin said he expects a significant pickup in the economy in coming quarters, noting “There is no question Americans are seeing the benefits of tax cuts.”
And in fact, the health of the American consumer — which underpins our overall economic health — appears quite strong. As evidence, all we have to do is look at record spending on Black Friday and Cyber Monday.
Online shopping on Black Friday hit a record of $5.4 billion. That’s up 22.3% from one year ago.
Cyber Monday also broke records, racking up a total of $9.4 billion in online sales. That’s up 19.7% from a year ago.
Plus, as I write Friday morning, there’s news that employers added 266,000 jobs in November, pushing unemployment to a 50-year low of 3.5%. In other words, the job market is incredibly strong, fueling an economic expansion.
Bulls also have good answers to many of the red flags thrown out by bears.
For instance, take the inverted yield curve from this past summer. While typically a harbinger of a coming recession, the inversion may actually be a case of “this time it’s different.”
Why?
Global capital flight.
Bulls argue that what’s really happening is that the U.S. is the sole economic strength in a world where Europe is in trouble and the leading economies of Asia are slowing.
And as a result, yields for government bonds from the leading issuers in Europe and Asia are increasingly heading into negative yields.
This in turn is making the U.S. bond market all the more attractive with positive yields. That is driving more buying from investors inside the U.S. and beyond. And with more buying of longer-term bonds — yields are down, and prices are up. Hence, the yield-curve inversion.
And what about the case that U.S. stocks are horribly overvalued right now?
Well, bulls will point toward growing future earnings.
To make sure we’re all on the same page, the most common valuation metric is the “price-to-earnings” ratio, or “PE Ratio.”
But which “earnings” number an investor uses in this ratio has a profound impact on the final valuation — and there’s more than one option.
You see, investors who believe stocks are expensive today tend to look at either the trailing-12-month earnings figure, or a longer-term, 10-year averaged earnings number, used in the “Shiller PE.”
Right now, as you can see below, the Shiller PE number is 30.25 — one of the highest readings ever.
But if we sub out the 10-year averaged earnings for trailing-12-month earnings, we see the PE number drop, though it’s still higher than average from a long-term perspective, as you can see below (the average is 15.8).
But bulls will say “this is all wrong — why use earnings from the past when we’re interested in where the stock market is going? We should be using future earnings estimates.”
So, what happens to valuations when we sub in future earnings estimates?
According to market research company, FactSet, the forward 12-month PE ratio for the S&P 500 is 17.6. Obviously, this is only slightly above the long-term average number of 15.8.
Given this, bulls say that stock-market overvaluation-fear is totally off-base … and there’s plenty of room for this bull market to continue chugging along.
***So, what’s the answer?
This is where things get exciting …
Louis Navellier and Matt McCall are two of InvestorPlace’s most respected, and most successful analysts.
For any readers less familiar, Louis is one of the pioneering founders of quantitative analysis. That’s the practice of using predictive algorithms to forecast major moves in stocks and in the broad markets.
His models have correctly predicted three of the biggest corrections of the past 25 years including Black Monday in 1987, the dotcom crash in 2000 and the 2008 financial crisis.
Matt is an accomplished thematic investor, who literally wrote the book on the bull market we’re currently enjoying. Back in 2009, he authored “The Next Great Bull Market.” It forecasted many of the megatrends we’re now seeing unfold today — like the rise of solar and precision medicine …
Over the past 10 years, Matt has found over 200 stocks that have gone up 100% to 999%.
In recent weeks, Louis and Matt have realized that, though they approach the markets differently, they both share the same belief about where the market is going.
They found another parallel …
Both Louis and Matt have noticed that they’ve been seeing similar concerns from their subscribers — many of these concerns echo what we identified earlier in this Digest … the trade war, slowing global growth, an old bull market, global tensions, and so on.
And all of these concerns point back to the question that opened this Digest …
“Do I sell now and lock in my profits? Or do I stay in the market for 2020?”
Well, on Tuesday, December 10, at 7 p.m. (EST) you’re invited to hear Louis’ and Matt’s answer at an event called the Early Warning Summit 2020.
The guys will be discussing the major market moves they see impacting stocks in 2020. More importantly, they’ll detail how you should prepare for these moves in your portfolio today.
The event is 100% free. Even if you’re comfortable with how your portfolio is positioned, tune in simply to learn what two professional investors believe is coming our way.
Of course, if you’re nervous about whether your money is invested wisely for tomorrow’s market, then joining us on Tuesday is all the more important.
You can reserve your free seat by clicking here.
It’s a challenging time to be an investor. I hope you’ll let Louis and Matt make it easier for you next Tuesday.
Have a good evening,
Jeff Remsburg
