Push. Fall. Rise. Repeat.Submitted by RetireWiseCFP on September 9th, 2016
Push. Fall. Rise. Repeat ─ I first heard these words a few weeks ago from an NHL commercial as the League prepared its audience for the upcoming playoff season. Right away I saw the message as a perfect metaphor for what investments and the economy are all about. The “fall” part of the cycle, especially when sudden and dramatic, is what many people have a hard time with. They forget that the “rise” part will come after the fall part ends; and they often miss the “push” part because they are sitting on cash waiting for the perfect time. There is no and never will be a perfect time. We know beforehand that it is a repeating cycle: it is uneven—but it’s progressive in the long run.
Where are we now?
2016 could not have started any worse. The fall was pronounced, and when it was over, my favorite long-term sectors—pharmaceuticals, biotech, and energy—were down the most. Just when the fall was at its lowest, the rise began, little by little. The market headlines now tell us that all the losses of 2016 were recovered by end of the quarter. This is actually not true in pharmaceuticals, biotech, and energy: these sectors are still deep in multi-year double-digit losses. I don’t think all of the losses will be recovered in pharma until after the election is over. Politicians love to beat up on the healthcare sector during an election year.
Where do we go from here?
As many of our long-term clients know, I don’t like making market predictions. Please permit me to waive that modesty right now. I can say this with 100% certainty: oil prices will rise again. It may be late 2016 or 2017 or 2018, but it will happen because it is acycle. There will come a time when the demand and supply equilibrium tilts towards the suppliers again and—more important—when the market psychology of oil prices tilts toward higher bids. This is a fundamental reason that I don’t invest in stock market indices or seek to outperform any benchmark. My aim is simply to buy high-quality companies in a variety of sectors, and we’ve found over the long term that health care, banks, and energy are generally superior winners.
On fixed income and alternatives:
I wrote three months ago “…after more than 8 years of cutting and maintaining interest rates, the Federal Reserve Bank did indeed raise interest rates in December 2015. What is next? I think they are going to continue raising rates in 2016 until energy prices begin to rise later in 2016 and 2017.” They may have hit the “pause” button, but we are clearly in the “rise” phase of the interest rate cycle—unless we end up with a technical economic recession, which is different from just a down market.
What should we look out for?
Faster rate hikes by the Federal Reserve that are more than the real economy can bear. As shareholders in banks we at this time welcome higher interest rates, but are the American and global economies ready for higher rates? Other countries’ central banks are indicating NO, as they are reducing rates to zero and indicating a willingness to go to negative interest rates like Japan.
The need to and the ability to help clients focus on the totality of the cycle, not just the headline-grabbing fall phase of the investment cycle, is the raison d’être of my relationship with you. I know it is very easy to say but very hard for folks to be steadfast when markets were falling as we experienced the last three months. The one thing that I want YOU to be sure of is that with grace I shall remain steadfast and disciplined,because I know beforehand that it is a cycle of Push, Fall, Rise, and Repeat.
Femi T. Shote, MSF, ChFC, CFP®
Accredited Investment Fiduciary®