And away we go for another big year here at Profit Watch.
All the prawns and champagne of the Christmas period are now a distant — but very fond — memory.
I’m glad to be in the office. I need to escape the tyranny of my three-year-old daughter’s new trampoline.
I thought Ema would happily jump on it while I drink coffee and read the paper, relaxing in the summer breeze.
What a fool. She isn’t having any of that. According to her, dad is supposed to get on there too!
Alas, the markets call.
In front of us is the open road of 2019.
As ever, the windshield is cracked and dusty, and for sure we’re going to go off-road at some point.
We know where we’re going — 2020 — but only the good Lord knows how the road will look behind us by the time we get there.
Markets never do what we expect.
I spent some of the Christmas break going over some of the early 2018 forecasts from late 2017. I like to keep these kinds of articles aside every year.
Almost all analysts were too bullish on the market. I can forgive them for that — so was I.
One wonders if we’ve swung too far the other way now. Stocks got dumped in the last quarter.
The S&P 500 in the US was down 15% in the last three months of the year.
That punched the Aussie market in the guts as well.
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There weren’t many places to hide. 90% of asset classes fell in 2018, according to Deutsche Bank.
There’s some very good news among this…
It’s pretty simple. You can now buy stocks much cheaper than you could before.
I’m going to make a distinction about the recent sale in the stock market.
It looks to me like a technical selloff, and not an economic one.
What I mean is I don’t see a raft of downgrades suggesting a weakening outlook for earnings.
It looks more like uncertainly and volatility hitting the market. These kinds of clouds can pass.
But is that a probable outcome?
Let’s think about it this way…
Here’s a cool chart I saw from my colleagues at Stansberry Research just before Christmas.
It shows all the drawdowns in US stocks since 1965. It also puts the recent one in historical context:
Source: Income Intelligence, Stansberry Research
You can see the recent selloff is pretty sharp.
Now here’s where a bit of economics history can come in handy, though most people are oblivious to this.
The bigger falls that you can see — for example, in 1973/74, 1979, 2003 and 2008 — were much more difficult periods than we can observe currently.
It’s one reason I have 1998 on my mind…
1998 or 2008?
You see, US stocks took a pummelling in the middle of 1998 as well.
They fell just under 20% from July to August.
At that stage, stocks had been in a bull market for years, like today.
It would have been easy then to think that was the end of the road for stocks.
In 1998, the Asian financial crisis was still playing out and Russia defaulted on its debt.
Scary headlines at the time.
Here’s the catch…the Dow Jones would rise another 50% before topping out in 2000.
Easy to see in hindsight. But there was nothing obvious about such an outcome at the time.
I think there’s a higher likelihood of something similar playing out from here today than further big falls across the markets, like 2008.
It’s likely to be volatile, no doubt. But the risk is worth it if you can hang on. The final years of a bull market often have the biggest gains.
Yep — it might even feel ‘wrong’ to be buying, with the worried headlines around the world at the moment.
But nobody said investing was a breeze. You’re supposed to buy fear — and sell greed.
Take some comfort from an old adage in the stock market. The lower price you pay, the bigger your potential return.
An old colleague of mine, Kris Sayce, used to love going hunting for ‘beaten up’ stocks. Come to think of it, he still does.
Generally speaking, that’s not my usual approach. For example, usually I like to see volume and momentum going up.
But you have to deal with the market as it is, not as you prefer it.
Stocks are in the bargain bin
And for the moment, a lot of stocks have been sold down for no good reason. Investors simply bailed out of the market.
That makes a very compelling case for scooping up good projects while they’re on sale and betting on a rebound.
Consider that a lot of small caps are going to release their quarterly numbers over January. My expectation is that these will surprise to the upside and lift their shares back up.
This argument stems from my earlier comment that the recent selloff is a technical one, and not based on general economic conditions.
We’re going to find out very shortly if I’m on the money here.
Take note of one thing: The profit potential is taking a position now for this outcome.
Don’t delay, waiting for some kind of assurance.
As my old mentor used to say, if it’s in the news, it’s in the price.
PS: Just before Christmas, I released this report. The US selloff means the best tech stocks in the world are on sale. Go here to see why 2019 could be a monster for one stock in particular.