Anyone feeling bearish?

[hiriskpaul]

I have been feeling bearish on equities (esp. US) for years, but fortunately I gave up acting on such feelings a long time ago. My developed equities portfolio, which now consists mostly of trackers/ETFs had a total return of about 15%, helped along for once by being underweight US. So it was a good year for developed markets, but Emerging markets had a much better one, with TEM (my largest EM investment) delivering about 33% and my trackers/ETFs about 26%. It is worth noting as well that the returns from equities were actually held back this year from the bounce back in the pound and in dollar terms, rises over 2017 were larger than those in 2016.

Some of my fixed income stocks also had a very good year, with bank prefs especially finally throwing off the residual discount they have had since the financial crisis with TRs between 26%-34%. Amongst the dated bonds there were some good double digit returns from Premier Oil, Tesco and Co-op Group.

So plenty to be even more bearish about in both equities and FI. I have done my rebalancing over the last week, taking net cash out of equities and UK bank prefs. I did this early as Hargreaves Lansdown is stopping retail investors from buying US listed ETFs and I wanted to add some to my SIPP before the ban. I increased my holding of US equities within my SIPP and doubled my position in US REITs, but I now have an undesirable amount of cash sitting in our ISAs.

There are areas that have not taken part in the bull market these last 3 years, US REITs being one of them (4.2% yield for yield hogs out there) and in general value stocks have not kept up. So I may well move some cash into global value stocks (Vanguard Global Value Factor ETF) but will wait until March when I know better our CGT allowances situation. For FI, I still think Provident Financial and Premier oil (PMO1) are worth considering and may add to my current positions over the next few weeks. Other than those, pickings are very short on the ground.

As to so called crypto-currencies, I see them as being even more uninvestable than tulip bulbs. Eventually the mass delusion will halt and a lot of gullible people will suffer the consequences. Fortunately the inevitable crash is one that does not yet look as though it will have a major economic impact, but is certainly something to keep an eye on, especially now crypto-currency derivatives are starting to appear.

[DiamondEcho]

Maybe, this time it really is different? One thing for certain. A few weeks after the next slump, everyone will be saying how obvious it was that we were at the top.

No it really was different before and through the .com bust, and it is nothing like today IME/O. Back then there were maaany days you'd sit there and shake your head and say things to yourself like 'How is this possible?/This is amazing!/We're in a new paradigm/This can't go on/Amazing, it keeps going on etc/This is ridiculous, but it's happening' Looking back it felt like a slow-mo form of mass-insanity/dillusion; so many people convinced themselves the (old) rules no longer applied, 'they were old times, this is a new generation'. If you want a parallel perhaps look at e-coins, the way price moves are described, rationalised, are VERY similar IMO...?

[toofast2live]

No it's exactly the same. Funding Circle planning to IPO this year or early next.

Funding Circle reported a 59 per cent rise in revenues to £50.9 million in 2016 as it arranged more than £1 billion of credit for 10,000 small businesses. However, operating expenses resulted in pre-tax losses widening to £47.2 million,

Valuation range: oh, somewhere between 1 and 2 billion! Source, today's Times.

[DiamondEcho]

No it's exactly the same. Funding Circle planning to IPO this year or early next.

Funding Circle reported a 59 per cent rise in revenues to £50.9 million in 2016 as it arranged more than £1 billion of credit for 10,000 small businesses. However, operating expenses resulted in pre-tax losses widening to £47.2 million,

Valuation range: oh, somewhere between 1 and 2 billion! Source, today's Times.

NASDAQ P/E now 26.6 http://www.wsj.com/mdc/public/page/2_3021-peyield.html
'By the end of the 1990s, the NASDAQ hit a price-to-earnings (P/E) ratio of 200' [Wikipedia]

If you believe a factor of 7.5 is 'exactly the same' go ahead, I doubt there's much prospect of changing your mind
If some people wish to get involved in a potentially over-priced 'e.com' company, or the other latest 'new thing' then that's up to them, some things never change. Can I interest anyone in Ostrich farming BTW...

[BruceyBabey]

Obvious Statement Alert:
The reason this doesn't feel like a giant stock market top where people have lost their minds is because it isn't a giant stock market top where people have lost their minds!

Just a 20% US correction beckoning....

Which you should BUY the Trump out of.

But because the market is now full of tracker-owning-newbies-who-have-never-experienced-normal-volatility it'll seem like the END OF THEIR WORLD!!!!

And so we'll buy their stocks from them and watch it go way way back up again - WAY beyond current levels - without them onboard!

Cin cin, guys. No need to thank me!

[GeoffF100]

Anyone who thinks that the stock market is predicable should look at this:

https://www.bloomberg.com/view/articles ... hat-s-next

[BruceyBabey]

Exactly the kind of stuff that makes me more convinced that this bull is running on borrowed time. Thanks.

ROFL!!!

Thing about markets is you get to put your money where your mouth is....., so to repeat:

# This PHASE of the bull is on borrowed time so expect a US dump, ballpark 20%, by spring '19.

# Then while the passive newbies & vol sellers literally soil themselves and the busiest thread here is titled "20% down, new BEAR MARKET, time to PANIC!" I'll be buying the hell out of it....

# ...For the much higher highs to come in the mid-2020s. That's when we'll see the crazies appearing in stocks and the BIG "Danger, WIll Robinson!" alarm will begin ringing very loudly.

Laid it all out on a plate for you. Absolutely no charge PLUS a Brucey money back guarantee!!

[GeoffF100]

That is pure speculation on the unpredictable. As Bloomberg says, we should not expect big profits going forward, but nobody knows what will happen.

[BreakoutBoy1]

I still seem to be able to find things I like the look of at a reasonable price. The FTSE 100 looks about fair price right now in my view, and there are some pretty beaten up shares that may revert to the mean that I want to grab when cash allows.

For example: This is an exceptionally good time to add some regulated UK utilities as ballast thanks to the mad nationalisation ideas floating around. The situation as I see it with government coffers empty makes radical moves requiring massive expense less rather than more likely, so I am filling my boots with cheap RPI-linked yield while the sector is under a cloud.

[Lanark]

The current stock market valuations are based on the low and declining interest rates that we have had since the early 1990s.

When interest rates are low a company with a relatively low profit/dividend will look an attractive investment compared to the fixed interest rates available. It also allows companies to borrow capital at low rates giving an illusion of real growth, this also tends to bolster the share price because the company is seen to be growing. The costs to maintain their debt may be growing each year, but if interest rates are falling at the same time then the total debt costs may appear to be steady.

So the danger is that at some point interest rates rise and then those market gains disappear in a crash.

The problem we have now is that such a long period of low rates is pushing us towards deflation, when everyone, both individuals and companies has borrowed all they can - mortgages, car loans etc, we already have "emergency low rates" and a stagnation in wages, so theres nowhere left to go other than deflation.
Deflation would eventually see mass defaults as a declining income would no longer cover interest payments.

if governments raise interest rates to head off deflation, then you will see some similar effects (for the most highly leveraged) but you at least don't have to deal with the deflation - which would affect everyone.

The big unknown is timing, we could have a long slow decline like Japan or we could have a massive crash in stocks tomorrow. Like any attempt to time the market I could make a judgement that everything is overvalued and then sit on the sidelines and watch as stocks comtinue to soar for another 5 years.

[paulnumbers]

Thought experiment: this time next year.

Scenario
It becomes obvious to all and sundry that we are about to leave the EU without a trade deal, because the cabinet cannot agree on a deal, let alone agree it with the EU.
It will also become obvious by this point that the impact of this will be severe.
By this point, the Tory party will have torn itself apart, leading to a matter of time before a Corbyn government.

Impact
There is a good chance that this slow motion car crash will be post 'market peak'

Question
what do we do about it?

Invest in a globally diverse passive tracker such as this?

https://www.vanguardinvestor.co.uk/inve ... -ucits-etf

[TahiPanasDua]

The current stock market valuations are based on the low and declining interest rates that we have had since the early 1990s.

When interest rates are low a company with a relatively low profit/dividend will look an attractive investment compared to the fixed interest rates available. It also allows companies to borrow capital at low rates giving an illusion of real growth, this also tends to bolster the share price because the company is seen to be growing. The costs to maintain their debt may be growing each year, but if interest rates are falling at the same time then the total debt costs may appear to be steady.

So the danger is that at some point interest rates rise and then those market gains disappear in a crash.

The problem we have now is that such a long period of low rates is pushing us towards deflation, when everyone, both individuals and companies has borrowed all they can - mortgages, car loans etc, we already have "emergency low rates" and a stagnation in wages, so theres nowhere left to go other than deflation.
Deflation would eventually see mass defaults as a declining income would no longer cover interest payments.

if governments raise interest rates to head off deflation, then you will see some similar effects (for the most highly leveraged) but you at least don't have to deal with the deflation - which would affect everyone.

The big unknown is timing, we could have a long slow decline like Japan or we could have a massive crash in stocks tomorrow. Like any attempt to time the market I could make a judgement that everything is overvalued and then sit on the sidelines and watch as stocks comtinue to soar for another 5 years.

Lanark,

There must be a lot of truth in what you say even though prediction is notoriously difficult.

However, regarding rising interest rates, it seems likely that inevitable rises will be limited, probably avoiding the deflation scenario. Market drops are however highly likely. The rationale is as follows.

Since the late 80s to the present, interest rates in the developed world have been falling in an almost straight line that seems pretty impervious to, for example, the dotcom and financial crises. This suggests that something major is happening and some believe that a major component is demographic change. Western populations are ageing with the result that there has been a continuous rise in retirement savings in bank accounts, pension funds etc. thus pushing down rates. If this is true then we can envisage a limit on eventual rate rises.

This seems to suggest that governments are/were, to a degree, pushing on an open door with their attempts to limit rates through quantitative easing. Some proof of this lies in the fairly negligible downside where easing was reduced or even stopped.

The upshot of this for investors may be that we are over-rating the degree and harm of rate rises. By that I mean there is unlikely to be an Armageddon scenario. Nevertheless, there is a huge debt problem, the US market is overblown and a bust is on the books. However, as you say, we don't know when.

TP2

[Urbandreamer]

For example: This is an exceptionally good time to add some regulated UK utilities as ballast thanks to the mad nationalisation ideas floating around. The situation as I see it with government coffers empty makes radical moves requiring massive expense less rather than more likely, so I am filling my boots with cheap RPI-linked yield while the sector is under a cloud.

Each to their own. SSE is not a insignificant part of my portfolio.

However I recall a former Labour leader talking about a freeze on gas and electric bills while the current government talked about a "cap". Today on the news the fact that the train fares have gone up by RPI is being complained about and lobied against. The radical theft/nationalisation threat is not the only posibility for the future, though may be required if utilities are forced to a loss making position and the state requires them to continue trading.

The fact that BOTH parties seem to feel that there are votes to be won by undermining corperate returns is of deep concern. I'm not in a hurry to sell my SSE, but the geopolitical risk is not inconsiderable.

[toofast2live]

Thought experiment: this time next year.

Scenario
It becomes obvious to all and sundry that we are about to leave the EU without a trade deal, because the cabinet cannot agree on a deal, let alone agree it with the EU.
It will also become obvious by this point that the impact of this will be severe.
By this point, the Tory party will have torn itself apart, leading to a matter of time before a Corbyn government.

Impact
There is a good chance that this slow motion car crash will be post 'market peak'

Question
what do we do about it?

Invest in a globally diverse passive tracker such as this?

https://www.vanguardinvestor.co.uk/inve ... -ucits-etf

Oh dear! If you believe in that scenario the vanguard fund you link to is the least appropriate product to invest in.

[JamesMuenchen]

The top eight US shares by market cap are Apple, Microsoft, Google, Amazon, Facebook, Johnson & Johnson, Exxon and JP Morgan.

I thought Berkshire Hathaway was in the top 5?

[GeoffF100]

Vanguard has Berkshire Hathaway as number 6:

https://www.vanguardinvestor.co.uk/inve ... folio-data

[Lootman]

The top eight US shares by market cap are Apple, Microsoft, Google, Amazon, Facebook, Johnson & Johnson, Exxon and JP Morgan.

I thought Berkshire Hathaway was in the top 5?

Yes, my mistake, for some reason it was excluded from the index fund I looked up. Historically BRK didn't appear in some indices because of its very high share prices and because a lot of the stock was tied up. It's still not in the Dow Jones 30 but was admitted into the S&P 500 when the "B" shares were split to make it more amenable to small investors and options trading.

To the point though, I don't think anyone would exclude it due to a lack of earnings, although some might because it has never paid a divdend.

[Daytona]

Email from Stockopedia signalling the top ?!
"Due to unprecedented demand we've extended our Christmas offer by 48 hours. Act now and we'll take 25% off your first year's annual subscription."

[Lanark]

The current stock market valuations are based on the low and declining interest rates that we have had since the early 1990s.

When interest rates are low a company with a relatively low profit/dividend will look an attractive investment compared to the fixed interest rates available. It also allows companies to borrow capital at low rates giving an illusion of real growth, this also tends to bolster the share price because the company is seen to be growing. The costs to maintain their debt may be growing each year, but if interest rates are falling at the same time then the total debt costs may appear to be steady.

So the danger is that at some point interest rates rise and then those market gains disappear in a crash.

The problem we have now is that such a long period of low rates is pushing us towards deflation, when everyone, both individuals and companies has borrowed all they can - mortgages, car loans etc, we already have "emergency low rates" and a stagnation in wages, so theres nowhere left to go other than deflation.
Deflation would eventually see mass defaults as a declining income would no longer cover interest payments.

if governments raise interest rates to head off deflation, then you will see some similar effects (for the most highly leveraged) but you at least don't have to deal with the deflation - which would affect everyone.

The big unknown is timing, we could have a long slow decline like Japan or we could have a massive crash in stocks tomorrow. Like any attempt to time the market I could make a judgement that everything is overvalued and then sit on the sidelines and watch as stocks comtinue to soar for another 5 years.

Lanark,

There must be a lot of truth in what you say even though prediction is notoriously difficult.

However, regarding rising interest rates, it seems likely that inevitable rises will be limited, probably avoiding the deflation scenario. Market drops are however highly likely. The rationale is as follows.

Since the late 80s to the present, interest rates in the developed world have been falling in an almost straight line that seems pretty impervious to, for example, the dotcom and financial crises. This suggests that something major is happening and some believe that a major component is demographic change. Western populations are ageing with the result that there has been a continuous rise in retirement savings in bank accounts, pension funds etc. thus pushing down rates. If this is true then we can envisage a limit on eventual rate rises.

This seems to suggest that governments are/were, to a degree, pushing on an open door with their attempts to limit rates through quantitative easing. Some proof of this lies in the fairly negligible downside where easing was reduced or even stopped.

The upshot of this for investors may be that we are over-rating the degree and harm of rate rises. By that I mean there is unlikely to be an Armageddon scenario. Nevertheless, there is a huge debt problem, the US market is overblown and a bust is on the books. However, as you say, we don't know when.

TP2

I agree that rate rises will be limited and I wouldnt be surprised if they get reversed quite quickly, but also I think that another round of QE would do nothing to boost the economy, they are pushing on a string - the banks have run out of places they can lend to even at super low rates.

So the next step is likely to be printing probably directly pushing money into the economy as part of some large infrastructure projects, improved rail links, (perhaps renationalising), new regional airports, support for electric cars or Brexit related things.
It will be a difficult balancing act - if they print enough to avoid deflation, they will almost certainly overshoot and we will finally get some real inflation back into the system, and then they will HAVE to raise interest rates to keep that in control.

[TahiPanasDua]

TP2[/quote]
I agree that rate rises will be limited and I wouldnt be surprised if they get reversed quite quickly, but also I think that another round of QE would do nothing to boost the economy, they are pushing on a string - the banks have run out of places they can lend to even at super low rates.

So the next step is likely to be printing probably directly pushing money into the economy as part of some large infrastructure projects, improved rail links, (perhaps renationalising), new regional airports, support for electric cars or Brexit related things.
It will be a difficult balancing act - if they print enough to avoid deflation, they will almost certainly overshoot and we will finally get some real inflation back into the system, and then they will HAVE to raise interest rates to keep that in control.[/quote]

That is surely a very possible scenario. The hard part for us is to know what to do as investors. I certainly take such best guesses into account but invest on the basis that anything can happen and nobody knows anything. That boils down to conservative stock picks, maximum diversification and LTBH. Nothing so unusual there then!

TP2.