The S&P 500 has declined more than 9% over the past three months; global debt levels are north of $240 trillion (that’s with a T); emerging markets are no longer emerging; the Federal Reserve is no longer taking a dovish stance; U.S. dollar strength is putting pressure on earnings; the energy market is suffering from its biggest plunge in history; and massive layoffs are taking place on a consistent basis, which will slow consumer spending.
Despite all of the above facts, many pundits remain bullish. Listening to such pundits can lead to very poor investment decisions. Their selling point is often, “Stay the course. The market always comes back.” While this is true, it sometimes takes decades, which will most certainly could be the case for the upcoming bear market. No investor wants to wait decades to make money, and for most investors, they will just be hoping to get back to even. For those who are unsure of what will happen next, hedging with a long/short/market-neutral approach would be a wise strategy.
If you remain bullish, then it’s still possible you’re correct, but a lot would need to go right, and you would be betting against some very popular names with impressive track records.
Faber has been bearish for years. This has made him a laughing stock at times, but he was just early because he was unable to anticipate the incredibly accommodative monetary policies implemented by central banks around the world since 2009. You can make the argument that he should have seen this coming and planned accordingly, but he has been correct about the underlying economy the entire time.
He recently made the following statement: “The medium-term economy looks so depressing that I may as well fill my newly installed pool with beer instead of water.” (For related reading see: Worried About a Recession? Consider These Stocks.)
He also recently stated that he wouldn’t see another bull market in his lifetime. He is 69 years old.
According to Faber, the reduced impact of central bank intervention, slowing commodity demand in China, and the credit bubble in China are all concerns. On the bright side, Faber believes that emerging markets will present long-term investment opportunities, specifically in Vietnam and Cambodia, with Brazil and Russia presenting potential turnaround stories in the nearer term due to such depressed conditions.
Jeffrey Gundlach is the founder of DoubleLine Capital. He said some interesting things recently at an ETF conference:
“Either the Fed dials down its hawkish rhetoric or markets will humiliate them by going down.”
“The only place there is inflation is in rents.”
“Do not buy a junk bond fixed income fund. You’re going to end up selling at a loss as they get more and more populated with distressed energy and mining issues.”
“China’s real growth rate could be negative.”
“Emerging markets could fall another 40%.”
He also pointed to the ISM Manufacturing Index already being in recession territory, and the ISM Non-Manufacturing Index trending lower. (For related reading, see: The Top 5 Bond Mutual Funds for 2016.)
Like Faber, Gundlach is bullish on something. In this case, it’s India. However, he believes that India could be dragged down by cratering emerging markets prior to making a strong rebound and presenting an excellent long-term investment opportunity, which will be driven by a massive labor force that continues to grow.
Bill Gross, formerly of PIMCO and now at Janus Capital Group, believes the U.S. is headed for recession, but more likely over the next 24 months opposed to over the next 12 months. He cites high leverage in the corporate sector as well as defaults in the energy sector, the latter of which will lead to reduced investments, lower housing starts, and a weaker consumer. That last point is important because the consumer represents approximately two-thirds of the economy. (For more, see: PIMCO - How it Has Fared Since Gross' Departure.)
In regards to emerging markets, Gross feels as though they’re significantly depressed.
Gross also believes that there should be no more rate hikes this year as inflation expectations are very low at 1%-1.5%.
The Bottom Line
The best person to listen to is yourself, especially if you invest the time to dig deep on what’s taking place in the global economy and throughout specific industries. This might sound time-consuming, but investing the time would be well worthwhile if it can save your portfolio. If you don’t want to put in the time, then consider listening to those with strong track records on economic conditions. The three names above fall into that category. (For more, see: Volatility Vexed? See What the Experts Are Saying.)