The stock correction we have anticipated for some time appears to have materialized. As I write this before the open Tuesday morning, stocks have plunged worldwide, and US stocks look to open much lower today in the wake of a sharply lower Asia and Europe, which themselves plunged in reaction to Wall Street, and will probably themselves drive US stocks lower until the vicious cycle abates.
Despite the widespread frenzy, we don’t think this is the beginning of the end of the current bull market. Instead, we believe this to be a quite healthy and long-overdue price correction which should bring US stocks more in line with reasonable historical levels of valuation as a base for the next leg of the US bull market, which we expect will continue, fueled by great economic numbers and a continuing US expansion, wonderfully profitable US companies, the robust worldwide economic recovery which should drive even more US company profitability, a looming “really big deal” US infrastructure initiative that could pump close to two trillion US dollars to companies in the US economy, and the double steroid shots of tax reform and foreign profits repatriation, which could bring billions and billions back to the US of A and further spur growth and profits.
Clearly, we are excited about the future for US stocks, but note that we are in a late stage bull market, and that valuations even after the selloff are still no bargain. What is still very cheap are most non-US markets, which have got cheaper still as they’ve gone down in lockstep with US stocks in our increasingly-correlated world. We think these stocks are now very cheap and should be accumulated.
Here are some strategies we think very appropriate now:
- If you have been holding cash against a market drop or for other reason, and this cash is part of your long term wealth building portfolio, this is a very good time to consider deploying it. Consider a healthy diversified mix. Camarda recommends over 50% of equities in non-US stocks.
- If you have been holding older positions with Camarda or from elsewhere because of unrecognized capital gains, those gains just got shaved considerably. You will still pay some tax, but less, and you won’t beat those taxes in this lifetime. This is a good time to consider reallocating to an updated portfolio, basically selling the old (or some of the old) and deploying the cash into an updated portfolio at the same time. This is an important point – you are selling lower, but buying lower too. If you sell but wait to buy and the market bounces strongly (as we expect it will), you will have outsmarted yourself.
- If you have IRSs or traditional 401ks, consider converting these to ROTHS. You will pay the tax now (the tax is inevitable) but will enjoy future growth tax free. Discuss with your tax preparer. This could be a really valuable move for you.
- If you or those you care about have bonds, we suggest you come up with a strategy to bail. We see the bond sell off continuing for a long, long time – years or even decades – as interest rates inexorably climb. In fact, one strong theory for the current sell off is the better than expected jobs data from last week, sparking faster-than-expected US inflation, and perhaps driving the Fed to raise rates even faster than it has indicated. Rates go up to cool the economy and temper inflation, but rising rates hammer bonds. In case we were not clear, we expect bondholders to get nailed.
- If there are stocks you like but you are not ready to buy because you think the market will go lower still, consider selling cash-covered puts with your broker. You get paid for the puts, but are obligated to buy if prices drop to the put exercise price. If that happens, you get the stock you want at a lower price, and get paid a little for the opportunity.
Again, don’t panic! We believe this correction to be healthy, necessary, and long-overdue. Stocks rarely go straight up, despite the US market experience since 2009, and especially since the Trump election. Take the long view, stay focused on the long run, and clearly see the silver lining in this passing cloud. Especially, consider tips 1-3 above, and discuss them with your Camarda Personal Wealth Advisor if you are a client. Jeff, for one, has breathed a huge sigh of relief that the fantasy market is over. He is also putting a lot of cash to work.