Interest rates are headed higher. Here in Australia, I don’t necessarily expect the RBA to shift rates at today’s meeting, but globally the trend is heading up.
Trade tensions have been worsening, and seem likely to continue.
Corporate earnings growth could suffer as easy money dries up.
Investors don’t have a shortage of reasons to sell stocks today. That’s why I’m betting on more market declines ahead.
And that’s why asset managers, especially in Asia, aren’t holding their breath. Stock indices in China are among the worst performers recently.
Because these Eastern markets are dominated by mom and pop investors who are largely driven by sentiment, it could take some time before buyers make their way back in.
‘The revival of market confidence isn’t going to happen overnight and the market may still carry risks in the short term,’ one Shanghai fund manager told the South China Morning Post.
You could say the same about stocks in the US.
The US economy is getting better. Trade tensions aren’t helping, but higher interest rates could mean more expensive stocks (because investors will be discounting future earnings at a higher rate).
This is what a Morgan Stanley equity strategist fears. The rise in US interest rates from September to October now puts US stocks in the overvalued territory, the strategist said.
If US stocks fall further, expect to feel more pain here in Oz.
Is it even worth hanging around to find out what happens next?
What to do if you’re about to retire
To jump or not to jump out of a volatile market, that’s the question the mainstream is asking right now.
At first, I thought that staying in would be the best option. Volatility is your friend. It gives you a chance to buy stocks cheaper and sell them for dearer prices.
But what if you’re not in the market to pick stocks? What if you’re close to retirement and you’re just holding the market right now?
If that’s the case, we have to think a little differently about your decision.
From the Australian Financial Review (AFR):
‘Shane Oliver, chief economist with AMP Capital, says the August to October period marks anniversaries for a number of financial market crises – including the 1929 share crash, 1974 bear market low, 1987 share crash, the emerging market/Long Term Capital Management crisis in 1998 and the GFC.
‘“Long periods of good growth, low inflation and great returns are invariably followed by something going wrong,” Oliver says about market corrections. “If returns are too good to be sustainable, they probably are.”’
You can thank the banks for those ‘too good to be sustainable returns’. What Oliver refers to is irresponsible money creation. Too much money is vying for too few stocks, deals, good and services.
The AFR continues:
‘Since most investors’ exposure to the stock market is through superannuation, Frontier Advisors also analysed the performance of four popular investment portfolio strategies ranging from high growth, which is predominantly Australian equities, through too conservative with 70 per cent fixed income.
‘“Investors who got nervous during the GFC and switched are well behind,” says Frontier Advisors principal David Carruthers. “Those that rode it out have done really well.”’
I can’t tell any of you what to do. I simply don’t know anyone’s personal situation. But maybe if we look at what the greatest investor is doing it could give you an idea or whether to stay in or jump out of this market.
All you need is one great business
Buy backs are rare at Berkshire Hathaway Inc. [NYSE:BRK]. Even rarer are dividends.
Warren Buffett likes that Coca-Cola pays dividends. The company doesn’t earn terribly high returns by reinvesting cash back into the business. Plus he can do a far better job than Coca-Cola’s management of allocating capital to get the best return.
Instead he can give cash to higher returning businesses, which generate far better returns for Berkshire shareholders.
Buffett also likes it when companies that he’s buying are buying back their own stock. Yet Mr Buffett rarely buys back Berkshire stock.
Why? Because when Berkshire goes on sale, it’s likely a whole bunch of other stocks will go on sale too, some of which will trade at far larger discounts.
Yet 2018 is not one of those years.
Berkshire is deploying money. But a lot of that is to buy back their own stock.
According to the Financial Times, Berkshire repurchased $1.3 billion worth of stock during the third quarter.
‘In his most recent annual letter to shareholders, Mr Buffett said that sensible purchase prices remained the key barrier to nearly every deal the company had reviewed in 2017 and likened Berkshire’s deal making restraint to a drought.’
Does this mean that all other stocks are overvalued? Not really. Just the ones that Buffett understands.
Maybe this isn’t a strategy you’re comfortable with: loading up on one stock as we head into more volatile times.
But if you are going to ride out this volatility, take comfort that the world’s greatest investor is by your side in the market.
Editor, Money Morning
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