For 2020, Expect The Unexpected (Again)

"It's still a bull market, things are going from the lower left to the upper right and will continue until they stop" said Dennis Gartman to Bloomberg's Tom Keene on a Bloomberg Surveillance podcast on December 19 shortly after announcing his retirement after a 30 year career as an investment writer. Asked about what to do for 2020, he suggested: "pray". He also quoted famed economist John Maynard Keynes who, back in the 1930's stated that "markets can stay irrational far longer than you and I can remain solvent".

There are plenty of opinions on both sides of the bullish/bearish equation and while, at the moment, the bulls are in control (The American Association of Individual Investors had the bull camp at 44.1% on December 18th and the bear camp at 20.5%), this was the case just before the December 2018 debacle.

It is no surprise to any of you who read my blogs that all this bullishness makes the hairs on the back of my neck stand at attention. My contrarian nature, after witnessing the last 40 years in financial markets has me in super caution mode (as far as stock markets are concerned). 

According to a newly transferred-in client, their former advisors warned them of my (our High Rock) large position in cash. How they can make that claim certainly amazes me as each of our clients has very different and tailored portfolio strategies, but nobody has more than 1% cash. We may have an underweight exposure to equity markets which means that we have more exposure to High Interest Savings funds (which offer approx. 1.95% in annual interest) until we see better valuations for investing in stocks, but that is not cash.

Unlike many advisors, as portfolio managers, we offer our High Rock clients the option to be invested in the same assets (same mandate) as we (Paul, Bianca and me) are (% weightings varying according to our individual strategies as determined by our Wealth Forecasts). Which is always their choice. A choice that can, at any time be adjusted to be more or less aggressive than we might want to be. It clearly minimized the downside in 2018, but likely limited the upside in 2019. If stocks continue to rise, 2020 will possibly be a year of under-performance. If volatility returns in 2020, our clients will be protected. Regardless, every client with a Wealth Forecast will progress towards their long-term goals while we manage the risk associated with achieving them. As we will always say: why take more risk than necessary and increase the chances of not achieving your long-term goals.

So 2020 will likely provide opportunity to put more money into stocks as it has in the past:

And we will look to find those opportunities when they are presented as we have done in the past, but we will do it when we believe, for our own portfolios, that it makes good risk-adjusted sense for our own strategies and for those clients (the large majority) who have entrusted us to look after their long-term financial goals.

2020 will bring plenty of challenges to the global economy and the geo-political environment. The U.S. Federal Reserve issued a report suggesting that President Trump's trade policies have (no surprise here) levied a negative impact on U.S. manufacturing. The U.S. deficit is ballooning (lower tax revenue and increased spending) in times of economic growth, which limits the ability of the U.S. treasury to be able to assist in an economic downturn. The Phase 1 trade deal between the U.S. and China will not have any immediate impact, so in the lag time, there will be plenty of uncertainty. 

Canadian GDP growth was negative in the first month of the final quarter of 2019 and confidence is slipping. Bank of Canada inactivity on interest rates may in fact be hurting the economy as rising bankruptcies have become a problem with household debt levels at close to record highs and debt-servicing costs rising. If unemployment rises, marginalized high-debt households will only exacerbate the bankruptcy situation.

As our good friend David Rosenberg suggested in his December 20 Breakfast With Dave letter: "the stock market has a mere 7% correlation with the economy today... this has never happened before... Normally, what the economy is doing explains at least 50% of the moves we see in equities...But not in today's controlled landscape driven by algo's, leverage, ETF flows and central banks".

If stock markets continue to rise, we will continue to capture the benefits, but perhaps at a more conservative level. If they don't, we are prepared. So, why take on more risk (as stock prices rise, risk increases) than is absolutely necessary (for your long-term goals)? 

Of course you can, if you want to, your money is your money. With my money, however, I prefer to be more cautious and that has benefited me in the past and will likely do so again in the future. My eyes are on my long-term goals.

Wishing you all a happy, healthy and prosperous 2020!!