The SP500 returned 19% in 2017, -6% in 2018, and 29% in 2019. Technically, stocks are likely to continue to rise another 6% to 3,420, which is the symmetrical opposite to the Dec 2018 low. If this high is reached, the risk of a correction is strongest. (See chart.)
BlackRock, the world's largest asset manager, says that emerging market currency and stocks are significantly undervalued. This has been the case for many years, however, due to the strengthening US dollar, foreign assets will continue to underperform regardless of valuations.
The last ten years have been difficult for diversified portfolios and those who subscribe to 60 years of proven investment standards. The largest US companies (SP500), have since been the repositories of global excess liquidity as bonds are becoming less available to meet demand.
In the 2008 global financial crisis, stocks dropped 40%+ which is a tail risk of centennial proportions. We are now seeing the other side of the bell curve tail, where the sustainability of an 11 years equity bull-market becomes increasingly less likely.
Market manipulation by central banks, unprecedented corporate tax-cuts, and lax regulations and have made this the Goldilocks era for conglomerates. The increasing amount of global excess capital is seemingly only interested in safe bets, like that of the SP500 and less motivated to take on any risk in smaller or foreign companies.
What we need to watch out for are signs of deflation which is becoming more likely as Europe and China seem stuck in their stagflation. Stocks’ generous gains are not typical of deflation, however, the hyper-stimulus measures as I stated before may have been the catalyst for this growth.
Traditional ways to defend against deflation is to hold long-dated bonds and fewer precious metals and real estate. On the other hand, if you believe inflation is headed our way, then that's a very optimistic point of view and it must assume strengthening global growth, which I'm not seeing.
Geopolitical risks have also increased significantly. Protesters around the world are not only fighting for their independence but also because of higher living costs and a lack of rising wages. A war with Iran looks far more likely, if it hasn't already started, which may pressure central banks to take further action by lowering rates.
At Eureka Wealth Management, I’ll help prepare a diversified portfolio that takes into consideration the risks ahead as we see them and make adjustments ongoing depending on market conditions. I’ll also prepare your retirement plan and plan for the unexpected. Call for a free, initial consultation at (760) 537-0791 or online at eurekawealthmanagement.com.