Last week, I showed you why emerging markets—not U.S. markets and not European markets—are the profit opportunity for 2019.
Where is the money to be made in the New Year beyond stock markets?
Bonds Are Now Competitive
I believe U.S. financial markets will remain volatile through 2019. Rising interest rates and the late economic cycle alone would translate into continued volatility. Add in the current political risk born of President Trump’s unconventional leadership style and rising trade tensions, and we are faced with a very unpredictable situation. I don’t see any of these underlying conditions changing for at least two years, meaning we investors need to be looking for opportunities to profit from the uncertainties.
An easy and effective way to combat volatility is to park funds in bonds. Chances of a recession are high, as are stock market valuations. If you are a prudent and risk-averse investor, then this is the time to begin allocating your portfolio in favor of low-risk bonds.
Government bonds are becoming increasingly attractive. After years of near-zero interest rates, government bonds are finally offering competitive returns. U.S. Treasury yields range from 2.3% to 3.3%, comparable to stock market returns but with much lower risk. Year to date for 2018, the S&P 500 has returned only 0.46%; the Dow just 0.56%.
Bond rates are rising, meaning bond prices are falling, so the best strategy would be to create a bond ladder structure with bonds of short maturity.
In a bond ladder, maturity dates are spaced evenly apart, allowing you to reinvest proceeds at regular intervals. This way some of your bond funds are always maturing, making your holdings more liquid. Moreover, if interest rates are rising, as they are now, bonds with short maturities allow you to reinvest proceeds for higher yield.
U.S. Treasuries of one, two, and three years until maturity serve best in this situation. An average U.S. bear market lasts 13 months. If that is what we are facing, the ladder structure I’ve described will carry you through the correction, leaving you with ready funds to invest when blood is running in the streets.
The Bullish Case For Gold
With the ongoing volatility, we’ve had a return to inflation. For now, it seems manageable, especially with oil prices falling below $60 (WTI).
As long as inflation remains under control, and interest rates rise at a steady pace, gold prices will fall or stagnate. Government bonds are gold’s biggest competitor in the safe haven space, and a rising interest rate environment makes them more competitive.
However, there is a bullish case to be made for gold. The Federal Reserve (FED) is not all powerful in combating inflation. Raising interest rates too quickly puts the stock market at risk. If the FED fails at its attempt, and the situation leads to hyperinflation or even stagflation (economic stagnation combined with high inflation), then gold is your best bet.
Hyperinflation or stagflation might seem unlikely or impossible in the modern United States, but, the truth is, the possibility is greater than you might think.
Let’s say Trump unveils tax plan 2.0, giving the economy another boost. Productivity increases, as do wages, and people start spending more, creating inflation. Meantime, the world economy readjusts itself in the wake of the trade war, and oil prices begin to rise again. The FED follows with interest rate hikes, keeping inflation at bay, but fears overdoing it because of the volatile stock market.
In this scenario, all you need is a catalyst—a war in an oil-rich country, a new trade dispute, elections, an asset bubble—something that would threaten the stock market, freeze the Federal Reserve’s ability to raise interest rates, and lead to out-of-control inflation.
Chances of this scenario playing out are slim today but could increase in the future, so stay alert. Under these circumstances, gold becomes king.
If you’re looking at investing in precious metals today, I suggest you consider silver over gold. Industrial purposes represent around 60% of all silver demand, so silver can benefit from global growth, as well as market turmoil, with the latter having a more significant impact on the price. Furthermore, the gold to silver ratio is reaching levels we haven’t seen since the early 1990s, meaning silver offers more upside.
Crypto Values Post-Bubble?
Cryptocurrency investors will forever remember 2018 as the year the crypto bubble burst. The market has declined by a staggering 85% since its January highs and is still falling. Where the decline will end remains to be seen, but I believe we’ll reach this point in 2019.
While crypto values declined this year, the underlying technology improved. More vendors are accepting cryptocurrencies, more decentralized apps (dapps) are being developed on blockchains such as Ethereum, Eos, and Cardano, and more financial institutions are testing payment infrastructure from the likes of Ripple and Stellar.
The problem everyone is grappling with right now is determining the right price. Timing the bottom of any market, let alone one as young as the crypto market, is impossible. However, I think the real value of this market is between US$50 billion and US$100 billion.
When should you think about buying back in? A simple strategy I recommend is to enter when the market recovers by more than 50% from its lows, with a 20% stop loss. A recovery of that magnitude indicates a change in the market sentiment, while the stop-loss protects you from a potential bull trap.