A record snowfall is over in Baltimore.
The whiskey and wine were the first to go Friday. Don’t judge; I had more help for this task than planned, though the company more than offset the loss.
The cavalier attitudes were next, long gone by the time the shoveling was over. In fact, for an alarming number of people, it ended Saturday, right in front of my house, right in the thick of it.
A good half-dozen people braved the cold and weather, some in economy cars no less, and dared to tackle a hill that had one lane plowed, with a good eight inches of snow added on after.
They were lucky some people, and more importantly shovels, were available to help. Not one even bothered putting a shovel in their car.
They gave no thought to it at all. I couldn’t resist petulantly asking why, though I knew it was pointless.
Unfortunately, I have a feeling I’m going to be asking a lot more pointless questions of people who ignore what they face, overestimate what they can accomplish, and never learned when it is time to just hunker down.
Gradual Realization
As I outlined last week, I’m worried about the widespread delusions we’re seeing in the markets.
There still remains a lot of upward pressure whenever there isn’t sufficiently bad news.
Once enough negatives pile up though, a threshold is hit, the reset button is jammed and the market reverts to a level we passed back in early 2014.
Simply take a look at a chart of the S&P 500. For a good three years, the trend was solid. Then the floor dropped out in October 2014.
The highs have lost their momentum and are arcing down. The lows are roughly pegged to a level we first hit nearly two years ago.
On its most basic level, a chart like this shows us what is going on with buying and selling. Investors have formed a consensus that, when reminded of downside risks, they aren’t comfortable with the gains of the last two years.
It is also telling us that people are unwilling to keep bidding up prices after a drop as much as they were in 2015. They’re wising up, though it certainly isn’t all of them, and it is taking an awful lot of time.
I’m afraid many are whipping back and forth, driving greater losses as the institutional traders outmaneuver them, and are making even worse decisions in a bipolar oscillation between greed and mania, and fear and depression.
Middle of the Storm
In a climate with shrinking sales, revenue, and earnings declines, it doesn’t take much more bad news to hit the negative sentiment threshold, nor will it for months to come.
Earnings, revenue, and sales are all expected to keep contracting through the first and second quarters of this year.
Aggregate expansion of balance sheets is optimistically expected in the third and fourth quarters.
To put it another way, the earliest we’ll know if things will stop getting worse is in October. The earliest we’ll have relatively reliable estimates is in June or July.
Until then, there is plenty of bad news we’ll have to deal with. Earnings season isn’t over yet, which will have some nasty surprises for us, no doubt.
In the short term, we also are just hearing about Moody’s putting 175 energy and mining firms on review as low prices continue to cut deep into earnings.
This includes some of the biggest names in the sectors: BHP Billiton, Rio Tinto, Anglo American, Vale, Barrick Gold, Teck Resources, Eldorado Gold, IAMGold Corp., Newcrest Mining, Alcoa, Royal Dutch Shell, Total, Statoil, Newmont Mining, AngloGold Ashanti, and Glencore.
The list goes on and on, but I’d imagine naming just under 10% of the companies being reviewed is enough to show the billions upon billions of dollars at stake.
With oil and commodities as a whole suffering, the last thing these companies need is more expensive debt. Yet that is what many will get.
Then there are the longer-term issues. China will continue to slow, as it has for years. It will fudge numbers, as it has for years as well, and continue to alienate more people.
The unreliability and uncertainty it causes may be worse than the truth in the end.
Most of Europe is still floundering on life support. Emerging market corporate debt has risen seven-fold over the last 10 years.
The interest rate of nonfinancial corporate bonds in emerging markets has risen from about 5.5% six months ago to nearly 7.2% now, according to a Bank of America Merrill Lynch index, a 30% increase in interest costs as growth grinds to a halt.
Hunker Down, Ride This Out
With all that is going on, the best course of action in the markets is the same as it is for anything else.
Know the challenges you face. Separate the headline and the spin from the data.
Don’t overestimate what you can accomplish. You’ll end up with far more risk chasing the gains or yields you used to get. The markets simply aren’t going to be what they were, and a cavalier approach is going to leave you stranded where you don’t want to be.
Finally, learn when it is time to just hunker down. Once you have a prudent course forward, stick to it and let this blow over.
The broad market may be in a bad place, but you don’t have to be, and you have your pick of investments to generate returns elsewhere. You just need to dig for them.
Jimmy Mengel has delivered great returns from rapidly growing companies in completely new markets, all while anchoring his portfolio with some of the most stable income plays in existence.
Nick Hodge has focused on emerging technologies that are rapidly being adopted, and impending growth from massive government subsidies and energy policy shifts that will funnel trillions of dollars into the 21st century power grid.
Whatever you do, play it safe, hunker down, and ride this one out. You, and your retirement, will be safer for it.
