Stocks, oil, precious metals, cryptocurrencies, emerging markets…
Everything seems to be in decline.
Clearly, the financial markets are going through a major shift.
And it’s in times like these that the greatest opportunities emerge, and new investing trends form.
So, with that in mind, let’s take a closer look into what’s going on, what the 2021 future will look like, and how you should invest for it.
The Three Market Risks Leading Into Correction
Let’s start first with the stock market selloff and the drivers behind it.
Number one was elevated prices. These always lead to a correction of some sort and a return from exuberance to normality. Given how high and fast the stocks have risen over the summer, it was expected that the correction would be just as pronounced.
The second culprit was the election risk. I’ve been talking about this for a while. Namely that Biden will be attacking corporations, and Trump criticizing trade with China. Typically, the stock market doesn’t like that kind of talk, as neither of these policies would benefit the economy.
The final risk was the second wave of COVID infections as we enter the flu season and the negative implications of potential lockdowns on the economy. Here, COVID struck sooner than expected, with Europe already reporting a rise in cases following the end of the tourist season. Overall, however, I believe that we will have the virus under control by the end of 2020.
Looking Beyond The 2020 Recession
Of course, I’ve been talking to you about these three risks for a while now, so you should have expected this correction.
Now that we’ve finally come to it, the big question is, where does it end?
Ideally, I would like to see stock prices decline by another 15-20%. However, ultimately, it will be the market that decides how to price these three risks and where to turn around. It could well be that we’ve already seen the worse for it, though I expect at least another leg lower.
Meanwhile, the bullish forces, the Fed money printing, and another round of stimulus checks, which will come eventually, are still intact.
Meaning that the bull market will continue once this correction runs its course. Chances of this being a double-dip recession are slim, and 2021 should see the global economy recover in a significant way.
I’ve also somewhat changed my perspective on stock valuations.
When you consider the trillions of dollars that we’ve printed in 2020, they don’t appear as expensive. If you look at the S&P 500 to gold ratio, which does an excellent job of adjusting returns for the central banks’ money printing, it’s up only about 7% since the March lows.
Furthermore, there are many areas of the market where valuations are attractive. Industrials, materials, financials, and so on. Those companies that will profit from the economy re-opening are still trading cheap.
That’s why my buy-the-dip plan is to use a barbell approach and invest one half in these types of companies, and the other half in what’s been working so far, namely tech. I wrote about this strategy in a previous article, which you can read here.
So, in short, I expect to re-enter the stock market in the following weeks, and I think you should too. The 2020 risks are playing themselves out at this moment, and the 2021 economy looks promising.
Meaning, the buy-the-dip opportunity we’ve been waiting for is here.
What’s Going On With The Precious Metals
Now, before I conclude, let me touch on the precious metals as well.
What I didn’t expect once this correction in the stock market began, and this was a mistake on my part, is that investors will choose the US dollar as the safe haven instead of the precious metals.
Most of the time, the two are inversely correlated, and this is also the case at this moment. Meaning that when the demand for the US dollar and its value increased following the stock market peak, the precious metals declined.
This has caused gold and silver to break through some critical technical levels and changed my near-term outlook on precious metals.
I expect the US dollar continues to appreciate while the stock market correction is in play, and this will push the precious metals even lower.
However, my long-term outlook remains the same.
The enormous sums of money the central banks have printed and will continue to print will erode the value of all fiat currencies and increase the value of real assets such as precious metals.
Meaning, while gold and silver could decline further in the coming weeks, you will still see them significantly higher in 2021 and beyond.
Exciting times ahead and lots of money to be made. I’m glad to guide you through it.
Good investing,
Leon Wilfan
For Cashflow For Retirement
