"Picking Up Nickels In Front Of A Steamroller"

I love this line! A credit to our friend, the well-known economist David Rosenberg in his daily market letter Breakfast With Dave yesterday in his discussion of the current state of equity market bullishness. So I "googled" it. First search comes up with a Seeking Alpha note suggesting that this was "coined" as an investing metaphor for those traders / investors who take high levels of risk in order to generate small returns. We also call it "chasing returns", but the image that "picking up nickels" conjures is somewhat more emphatic.

This is what happens when portfolio growth, dependent on  equity market returns, stalls out (as it does at the end of an investing / economic cycle) and anxious investors who have become overly complacent about portfolio growth start to realize that slowing economic growth, stalled earnings and lower inflation will likely reduce future returns. (see my blog from last week: "What Are We Going To Do for Growth").

It would appear that there are some following our lead when I see headlines on BNN Bloomberg suggesting that stock market bulls (cheerleaders) are starting to play defense. I am humbled. Growth may have to take a backseat to income generation, at least for a while.

U.S. stock markets got very close to their all time highs last week on hope for some resolution in U.S. China trade negotiations and tomorrow the U.S. Federal Reserve will announce their much awaited interest rate decision: expected to be a cut of 1/4%, but there is hope for 1/2% cut and worry over a more tentative signal of their "wait and see" approach. Clearly, if markets are close to their all-time highs, the good news is "baked" in to current pricing.

The political situation in the Middle East has ramped-up the levels of uncertainty for financial markets, so the prospect of volatility in post-Fed decision trading is going to be escalated.

Basically, for long-term investors, this is just a lot of noise. However, considering the last time the Fed erred on the side of restraint (last December), the S&P 500 swooned some 15% or thereabouts. That can make even the bravest of investors gasp. Especially when it happens in the span of a couple of weeks.

Deutsche Bank is another to suggest a decline in stocks is coming (of about 13%), suggesting that the U.S. stock market has run way ahead of growth. Whether it manifests itself or not in the short-term, the point is, if you are one of those personalities who can't help but look at your portfolio values daily (or even weekly, monthly) it is important to prepare yourself emotionally for the potential of big swings in total value. 

The more risk that you have (i.e. the more fully invested in stocks that you are), the bigger the potential swings in portfolio value you will be subjected to. The only real defense (if big swings make you emotionally vulnerable) is an underweight (relative to target) equity position and overweight cash equivalent position. You are not going to miss out much on income generation if you can get 2% on your cash equivalent safety position (relative to the dividend yield of about the same). A 15% swing in  a stock price makes the dividend yield almost irrelevant should you experience that kind of move in equity markets, whereby a cash equivalent position value will not budge. It just means that recovery time (and it will recover) will be quicker, especially if you have some good, experienced portfolio management on your side. I know that this is becoming a bit of a repetitive message in my blogs, but we manage risk first at High Rock and we believe that our discipline will add additional value over longer periods of time. We certainly will not go "picking up nickels in front of a steamroller"!! 

That is part of our fiduciary duty to our clients.