History doesn't repeat itself but it does rhyme

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History doesn’t repeat itself but it does rhyme.  When Mark Twain penned those words he might well have been talking about the stock market.  In 2008 at about this time the worry was subprime mortgages, and most of us thought that risk was basically priced in, and the next shoe to drop was the worse than we imagined, and the rest is history.  So here we are with the Denver Broncos winning the Super Bowl and really no indicators now that support growth in the US economy.  The so-called Super Bowl indicator isn’t all that accurate or relied upon, but the indicators in general have plateaued and begun to shrink.  So let’s take a quick review and see where we stand these days: 

 

Job Growth: While its still positive in the US its clearly declining.  The US economy has increased the number of jobs through 2015, but about a million less year over year.   

 

In looking at leading indicators, one of note that has been on the decline is the ISM purchasing managers index.  This basically measures the manufacturing sector and a score under 50 indicates contraction.  Here the latest score was 49.2, which while it is an increase of 0.2 isn’t worth celebrating.  First we’re still below 50, and second most of the other measures that make this up seem to indicate a slowing economy. 

 

The US Leading Indicator Index fell by 0.2 in December following relatively strong figures for November and December.  This index is made up from a number of indicators including employment figures, new housing starts and the manufacturing index.  By itself its hard to know whether that drop means a recession is imminent, but we can definitely see things slowing. 

 

So how does this affect your investments and investment strategy? First, you should know that when I go to a hockey game and one team is winning 4-1 with a couple of minutes to go I don’t leave early.  I know that we all know the probable outcome, but you can never be sure and besides I paid to be there!  I also don’t leave the theatre early when I head in to see a Disney movie. Second you should know that I’m generally really optimistic.  I know that over the longer term things will be better and that “this to shall pass.” The stock market is a little different though. If we are fairly sure that a recession is around the corner, staying to the end means watching your investments decline in value, and in all honesty that isn’t all that appealing to me. 

 

We know that the next recession in the US is closer than the one that is now distantly in the rear-view mirror.  We know that making a move here from the US, and to lower risk holdings isn’t without risk, but it’s a different kind of risk.  Here the risk is that I’m completely wrong and the markets surge ahead, and we’re in lower risk mandates which mean that instead of participating in that surge, we’re largely on the sidelines and gaining very little.  This is a risk that to me suggests we are going to try to avoid the big mistake.  As almost all of my clients are aware, Warren Buffett is a guy who I admire a lot, and its his opinion that investing isn’t just about getting things right, but not getting things entirely wrong.  So to me, our risk in moving to low risk mandates and defensive holdings is fairly limited. 

 

So the issue with a posting like this is that I can’t give you specific recommendations here.  All I can say is that my current clients and I should speak over the next few weeks and we should consider these changes: 

 

  • Move to a conservative portfolio and holdings for the majority of your funds. 
  • For the smaller remaining amount, we should hold defensive shares for the majority, if you are willing to take that portion of risk. 
  • For a sliver we could look at some shares in Canada or overseas that might still bear some fruit. 

So there you have it.  Its been a good run in the US, and now its time to re-patriate our funds and seek out some stability and security.  Just as the recession might come sooner than people realise in the US, we will also see a return to profitability there sooner than people think is possible. At that point it will be a question about whether we have the courage to act.