There is a fair bit of uncertainty surrounding the potential end of the current bull market with stocks. Citibank is stepping up to reassure investors that the outlook remains good.
We should never just take someone at their word when it comes to managing our finances. There are always voices out there that continually looking to get out attention, especially when it comes to the fate of our investments.
Often, the messages that we are sent conflict. We’re told on the one hand that there may be plenty to worry about over the coming year or two, while others seek to reassure us that things are just fine for now.
Most of the time, people just take in information, and don’t think enough about things. This is not something that we should be doing when it comes to our investments though, as we sit at the head of this table and ultimately make all the decisions, even when we decide to let others decide.
We’re seeing less bears take the stage now than we did earlier in the year, but the bears are still out there, perhaps lurking behind a tree to spring out at us if and when things sour more. We seem to be in an area that we could consider neutral right now, with people not saying a lot on either side, and people are taking a wait and see attitude now.
The mood with stocks has certainly been lifted at least a little by the two recent rate cuts that the Fed has brought us, along with the promise of more. This might even be more significant than some realize, as it serves to take control of the economy and push back present concerns.
While a lot of investors don’t pay much heed to the shorter-term views that we see so much of in the media, others may allow themselves to be confused at times, even if they aren’t the sort that wouldn’t act upon just rumors or often not even if the dim predictions come true.
Investors often do not have a clear plan, aside from the general intention to just hang on to their positions. There may be a point where concerns become sufficient to undermine their convictions enough to at least waver, and without a plan, it’s anyone’s guess what they may do.
Investors as a whole manage risk so poorly that once they do become too bothered, that’s generally well past the point where they should have acted, where risk has not only become excessive but intolerable.
You aren’t going to be led by the hand here and will often be given the wrong advice by people who don’t know how to manage risk very well either. Anytime we’re told to just stay the course, this means that we’re told to not worry or even pay attention to risk, and given that this is what got us this far down the river, this just tends to make things worse.
Those who sell investments will ask their clients how much their portfolio needs to decline before they would want to sell it, and if they don’t pick a big enough number, they are advised against the investment mix. It is as if it never occurred to them, or the people who come up with this, that you do not have to bear the entire risk of an investment because you could just choose to manage it.
If you choose not to, you at least need to make sure that you aren’t coming to this conclusion out of ignorance. The fact that people tell you to do this does not count as any form of enlightenment and we should at least be willing to examine the validity of any investment strategy that is pushed in our face.
If You Want to Manage Risk, And You Should Want To, You Need a Clear Plan
If we are willing to manage risk, and come up with some sort of plan to do it, we can not only prepare ourselves in advance, we can also ignore all the noise out there that falls beneath our threshold. We really want to be focused on events significant enough to get us to bail, to choose not to take on the current risk of an investment because it is beyond our comfort zone, and often beyond what makes sense as well.
In addition to this, there are also opportunities to seek to improve your returns by managing risk, as if you are out more than you are in during the risky times, this will add to your gains. Many people think that this is what timing your positions is all about, to seek to improve returns, but with investors, the main goal here isn’t so much that as it is protecting yourself enough from downturns.
Timing your positions for any reason can seem very daunting to investors, as this is not something that they are that accustomed to generally, and even the ones that are usually don’t have much of a plan and trade by the seat of their pants a lot. They actually seek to make things more complicated than they need to be. The underlying principle of timing positions is a fairly simple one though.
What we are looking to do here is to just get a feel of what direction we are headed in, whether that be with individual stocks or the stock market as a whole. There are only two possible answers here, that the outlook is sufficiently negative or it is not. If it is, we sell, if it is not, we don’t.
Sufficiently negative here isn’t a subjective thing, and it should never come down to our being more of a glutton for punishment than another investor, as excessive risk is not a personal thing, it is there or it is not. Our tolerance for risk will matter but far less than we think, because looking to actively managing this risk by getting out when things heat up too much will in itself provide us a hedge and allow us to be more invested in stocks regardless.
This is not laid out to us in a neat little package, the fact that stocks are now too risky to be in, and we have to come to that conclusion ourselves, or at least rely on reliable sources. The good news is that when these times come, it’s not so difficult to decide, and if we think back on previous bear markets that we’ve experienced, we will remember that we did have a strong sense that risk was too high.
Even with investors who hope to hold positions long-term, there are certain thresholds that need to apply, where things have indeed turned the wrong way. This isn’t so much about technical exits such as those a trader would use, as investors need to look to both the view on the street and the expected horizon in addition to just the charts.
An example of this would be during one of the several pullbacks that we’ve had this year. We may have given back a fair bit at times, but the overall outlook remained positive for the most part. It is this outlook that should have had us staying the course, even when some advisors told people the time to sell is now.
Selling into an uptrend is something investors should never do though, as if you aren’t going to be holding these investments on the way up, when will you be holding them? This is a terrible way to trade all around, and when your threshold is lower than traders, who at least will keep something as long as it is moving in their direction, you know that you are pretty off-base.
Citi Strategists Provide a Reassuring Perspective on Stocks
Advisors at Citi have provided us with their perspective on both the global stock market and U.S. stocks, taking into account what the landscape looks like right now and what we might expect next year. They give the stock market a clean bill of health and predict a 9% gain for stocks worldwide and a 13% gain for U.S. stocks.
As long as things keep moving up, this creates a type of momentum in itself, and this is actually the most fundamental reason why stocks move up over time. It really does come down to people investing more and as long as people are happy this will sustain itself to a degree.
Of course, this force can be overcome, and it’s not that bears are now extinct. It takes more now to knock the market off its game than it used to, and greater levels of investment is the prime force here.
Citigroup analysts also point out the role of companies buying back their shares, de-equitizing, and since its share price we look at, this does contribute to it positively as well.
Low interest rates are good for both the stock market and companies. Companies can both borrow and manage their existing debt more cheaply, in addition to the expansionary effect this all has upon the economy itself. The mood of the stock market is also improved by low rates, and this in itself might be the biggest contributor of all.
The strategists do not foresee an end to the trade war with China prior to the next presidential election, and therefore its effects are factored into their analysis, which serves to strengthen it. If the outlook was that we’ll be in good shape at the end of 2020 because a trade agreement will certainly be in place by then would be considerably weaker.
The effects of the trade war, in Citi’s view, will be “dampened by monetary policy. Rate cuts and further easing keep borrowing costs low and make [stock] valuations against bonds look attractive.”
When stocks go up, they look attractive versus bonds, so as long as this goes on, stocks are the place to be. This is not even a time where we’d want to be doing too much hedging, as the extent of our hedges need to be proportional to risk, which should be a lot more obvious to people than it is.
The bottom line is that we are nowhere near the point where investors should be looking to exit, and while we never really want to put our portfolios on autopilot, we probably could through 2020 anyway with the seas as relatively calm as they are.