Investors remain anxious about the trade war between the US and China as well as Brexit. Deutsche Bank’s chief economist, Torsten Slok, predicts slow growth for China and Japan which projects to appreciate the US dollar. If the UK Labour Party wins with promises to nationalize utilities, this could send trembles throughout the global economy.
DISCLOSURE: Nothing on this blog is meant as investing advice… just mere educational pontification on my part. Oh ya… and all the photos on this blog are taken by my iPhone.
According to the International Monetary Fund (IMF), the global economy has been downgraded to a “synchronized slowdown.” Housing price crashes are occuring in Australia, Sweden and Canada.
Corporate valuations are not yet overinflated like we normally see in most market corrections with a price-to-earnings (PE) ratio of 15 and 4.5% dividend yield on the FTSE 100. However, the PE ratios can increase if corporate earnings decrease and reduce share buybacks. Corporate earnings forecasts are projected to be lower in 2020.
Because of worries about the US/China trade wars and Brexit, corporations are returning earnings to shareholders through dividends, buying back shares to reduce the PE ratios, and focusing on cost-cutting versus future reinvestment. This five year pattern could possibly affect earnings growth in 2020.
Historically, a signal of a coming recession is the inverted yield curve which occurs when the two-year Treasury yields more than the 10-year Treasury. When the bond market is in trouble due to inflationary concerns, the party may soon be over.
“We are dealing with a fiscally unstable long-term outlook in which inflation will take hold,” says another former FED chair Alan Greenspan. “There are two bubbles: a stock market bubble and a bond market bubble.”
Inflation would trigger massive defaults in the record $8.8 trillion corporate debt markets.
Low inflation driving interest rates and unprecedented levels of debt combined with Trump tax cut stimulus has created one of the greatest bull runs over the last 10-years. Many of the catalysts mentioned above could bring down the house of cards.
It all reminds me of the 2000 tech bubble. Some experts like chief investment Officer Scott Minerd at Guggenheim Partners expect a 40% hit in S&P 500. That’s comparable to the loses in the 2007-2009 Great Crash. After the stock market tanks and people lose their life long savings, expect a return to “real assets” like real estate.
When the market crashes, I’m expecting the Fed to overreact, lower rates and flood the markets with “bail-out liquidity” which will lead to a housing bubble pop an estimated 5-7 years after the recovery. All the signs of a real estate bubble will re-emerge… subprime lending, mortgage fraud, and overbuilding in construction. In my opinion, the next real estate market crash will be the biggest crash in the history of America.
In addition, expect massive overregulation in cryptocurrency and hemp/cannabis after the next crash. Many of the scammy ICO (Initial Coin Offerings) will go under and the SEC will look to “save the day” by instituting regulations. Cannabis/hemp markets are currently valued incorrectly. Investors pour money into cannabis and hemp mistakenly thinking that these are scalable tech companies, whereas cannabis and hemp are commodities. It will be common knowledge after the next crash that 145 PE ratios in Canadian cannabis companies are insanely speculative. When it comes to cannabis and hemp, the only metric that matters is free cash flow.
Based on my personal pontification about the market, I am being way way more careful in deciding what to invest in. Media Tech, Ad tech, tv and film content, and the entertainment sector content historically are less affected by recessions although leverage and acquirers could vanish. I’d expect influencer marketing platforms to increase during tough times, as companies want more “bang for their buck” in customer acquisitions. I’m interested in real estate services software solutions in anticipation of a housing bubble albeit it being short-lived. Interestingly, I am more interested in real estate software than real estate itself.
Sometimes the best thing to do when anticipate a market crash is to sit on the sidelines and wait it out. Another view point is to focus more on companies with the potential for free cash flow that can “ride out” the storm.