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Unfortunately
investors as a group are slow to adapt to change, which can be a harsh and
costly lesson to learn. But where there is turmoil there is also
opportunity for those who can recognize change and make that adaptation.
From
1980 to 2000 the world enjoyed expanding credit and a seemingly forever
growing stock market. By the end of the twenty year run in stocks the
predictable investment environment led advisors and investors to believe in
an apathetic strategy of ‘buy and hold’ and ‘forget about
your investments’.
The
above chart illustrates the relentless rise of a US stock market from 1980 to
2000. For the average investor the above market conditions turned out
to be a trap. The majority of the investing public will usually enter a
bull market when it is the most exciting and nearing an end. The result
of not recognizing the change in the market environment is buying high, and
suffering through the inevitable bear market.
From
an investment standpoint a lot has changed from the relatively cool
80’s and 90’s. The above chart shows us the current decade
long bear market in stocks.
The
warning signs of instability are everywhere and this is devastating for stock
prices.
1) Trillion dollar currency markets that are thrashing up and down
like small cap equities.
2) A soaring bond market with near zero interest rates. (investors
seeking safety)
3) A skyrocketing gold price. (investors seeking safety)
4) An increase in the number of corporate scandals.
5) More corporate bankruptcies.
6) More unemployment.
7) Less available credit for consumers.
8) A devastated real-estate market in some nations and wounded
markets in others.
9) Entire nations imploding and falling into bankruptcy.
10) An
aging population wanting to retire, consequently there will be less of the
population producing wealth.
11) An
aging population requiring more medical attention, resulting in higher
economic costs.
12) More
government intervention in markets in the form of bailouts and regulations.
13) More
government social programs.
14) More
open frank and open discussion of market intervention by policy makers.
15) Wars.
16) A public
that is more heavily dependent on the government to “fix” these
problems, transfer wealth and intervene.
The
warning signs are there. The bells are ringing for those who are paying
attention. None of these things are evidence of an environment that
supports an expanding stock market.
The
world’s largest, trillion dollar currency markets bouncing around is
not a sign of stability. In the above chart the US dollar, as
represented by the black line, clearly trends sharply higher as the first
green arrow illustrates, then down as the red arrow points out, and then
again up.
Investors
are fleeing stocks and putting money into bonds no matter what the return
is. We believe this is clearly defensive and out of fear of the current
market environment.
People
are looking for work at a time when it is harder to get credit. Clearly
this makes it harder for the public to invest in stocks.
Investors
are looking for the safety of hard assets such as gold.
The
important message in this article is that one needs to recognize:
1) Markets are cyclical and not linear. Change is inevitable.
2) Investors must learn to recognize change in market conditions.
3) Investors must learn to adapt to change to protect their wealth
and possibly profit from it.
From
1980 to 2000 market conditions made gold a terrible investment. For 20
years capital fled from gold, oil, silver and other hard assets as it rushed
into stocks. A look back in history shows us that from 1970 to 1980
market conditions pushed funds from stocks and into hard assets.
The current market conditions have created opportunities in hard assets as
capital flows out of stocks and into “things”.
The
warning signs and opportunities are there for those who are watching and
adapting to changes in the market environment. Investors who stubbornly
hold onto outdated strategies will continue to suffer the consequences.
All markets will have their ups and downs, but in our opinion being aware of long term trends is the key to success.
Michael Kilbach
Editor
Investmentscore.com
Michel Kilbach is
the President and Editor or www.investmentscore.com,
an online publication designed to show investors how to make profitable entry
and exit trading decisions in high growth potential investments.
Investmentscore uses a unique scoring system as a visual guide to assist
investors in making lower risk / higher reward trades.
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