Bull Balls Won’t Save Your Retirement

I took a day trip to New York City with friends and family over the weekend to mourn the death of a loved one. 

We didn’t go to a cemetery, nor did we visit the memorials to what we lost in the September 11 attacks. 

No, we went to Bowling Green, in the financial district, to lay a commemorative wreath at the feet of the Charging Bull…

A 7,100 pound bronze sculpture depicting a symbol of aggressive financial optimism and prosperity. Aka, a “bull market.”

But imagine my surprise…

When we arrived, we did not find throngs of meme stock traders wailing and gnashing their teeth. 

No. 

Hundreds of people lined up to touch and get photos with the bull’s balls. 

People were patting and stroking them, as if for luck or for a magic turnaround in the markets…

As one might pat the belly of a buddha statue. 

I suppose I don’t blame them. 

Most people were blindsided by the terrible performance of the market in 2022…

They weren’t prepared for CPI inflation to hit 9.1% in June (I’ve been warning DIYwealth readers to expect these numbers at this time since August 2021)...

They weren’t prepared for the market and especially tech stocks to crash (I told everyone that this was effectively happening in December 2021)...

And they weren’t prepared for the Fed to start hiking interest rates or the damage this would do to wide swaths of the stock market, even though, in September 2021, I wrote this:

When Fed interest rates go down stocks go up. And vice versa. 

Another way to think about this is: When the Fed makes it easier for everyone to get cheaper loans, it takes about 3 to 5 years to impact asset prices, such as the stocks in your retirement account.

And a final way to think about this is: With the Effective Fed Funds rate at 0.07% and the heads of the Fed talking about “tapering” and raising rates… 

The evidence suggests that we should expect the returns from major market indexes over the next five years to be pretty mediocre or negative. 

This is just another reason, on top of the concern I shared last week, that I think the party in the investment markets is going to be on pause for a few years.

Everyone wants the Bull Market to come back – they want to “see the line go up” and they want to see it happen fast. 

But guess what…

In all likelihood, things are going to get worse before they get better. 

The economy is looking like a mixed bag, with lots of jobs potentially on the chopping block if demand continues to decline. 

Two of the indicators that seem to predict recessions quite well–an inverted yield curve and the rate of auto loan delinquencies–have both signaled that there’s trouble ahead. 

While the economy is not the stock market, the stock market definitely responds to macroeconomic conditions. 

And right now? The stock market STILL looks overvalued. 

As I write, companies are still anticipating higher profits this year… but even these profits will not bring the market anywhere close to seeming fairly valued. 

Over the next few weeks, from the time I publish this, we’re going to see a number of earnings reports that will tell us how realistic these expectations are… 

And whether or not we might be seeing more pain ahead. 

Considering how bad the first half of the year was (the second worst in a century!), it’s hard to imagine the market recovering by year’s end. 

Charlie Bilello over at Compound.blog had a great chart that sets expectations pretty well:

Basically, it’s possible that we might see a rally over the next 6 months.

Chances are, though, we won’t be out of the woods yet. 

So just exactly what is it that regular investors like you and I can do right now?

A Chance Encounter Gives Us a Hint of Insight

Before going to New York, I treated some friends to a nice dinner at what I think is the nicest steakhouse in Baltimore – the Prime Rib. 

While I was there, Bill Bonner, the founder of Agora and countless other businesses came up to shake my hand and say hello. 

We spoke briefly about how the only working financial promotions right now are selling doom and gloom and general bearishness and negativity.

I mentioned to Bill, in the reports and copy I write for the Japanese business, that I have been bearish since May 2021 (which I mentioned here). 

“Well, I think I have you beat,” Bill said. “I’ve been bearish since 1978!”

He went on to talk about the sentiment change in the market recently…

The market for financial information (you, the person reading this right now, are in that market) has turned its back away from “risk on” investing in tech and crypto and growth stocks and aggressive option trading strategies. 

Now everyone just wants to know one thing: 

How do I preserve what I have or even potentially grow it in the face of all these scary economic stories and dismal prospects?

I have been in the financial publishing business for… wow, nearly 10 years at this point. 

But I have seen enough offers and newsletters that I can tell you the bulk of the answer to this question, because the answer has not really changed much since 1978…

Tangible Assets - Precious metals like gold, silver, palladium, and platinum are hot commodities (though I’ve always thought that buying gold was ridiculous–and still do). Art, too, can be a place to squirrel away money. But a tangible asset–something you can see and touch–can also include things like rental property. 

Big High Quality Bluechip Stocks with Decent Dividends - Reliable income becomes much more valuable during a recession or economic downturn. So companies with stable margins and cash flow and reasonable dividends are attractive safe havens. (Check out $SPHD as a potential investment here.)

Consumer and Healthcare Stocks - People are still going to buy food regardless of what happens in the economy, so stocks that sell essentials tend to do fine. Pharma and biotech also does well–people still need medicine during a recession, after all.

Farmland - More so than gold, tech, or banks, farmland is a better safe-haven investment during a recession. 

Sell “Want Tos,” Buy “Have Tos” - As I mentioned before, people still need food and medicine and shelter during a recession. They have no option BUT to buy these goods. But things that people want and are generally just nice to have? Like airline travel, new cars, hotels, casinos? These businesses all get absolutely destroyed by recessions.

Bonds - Bonds are looking more and more attractive. I mentioned in a previous blog that I had invested heavily in I Bonds and will likely do so again in October. With bond prices going down and yields going up, $AGG might be an enticing investment for a little while.

Now…

For those of you who have a bunch of high risk growth stocks, there is a simple way to decide whether to hold on for the long term or to cut the stock. 

What you can do is look at the balance sheets of the stocks you have to make sure they have enough cash to support their operations for a few years so the recession doesn’t bankrupt them. 

How do you do that?

Step 1: Go to the SEC’s Edgar portal…

Step 2: Put in the ticker symbol you want to know about 

Step 3: Look up the most recent 10-Q filing to get the latest quarterly report

Step 4: Look for the line of the company’s balance sheet that says “Cash and cash equivalents” and take note of the number

Step 5: Look for the line of the company’s statement of operations that says “Total Operating Expenses” and take note of the number

Step 6: If the company’s cash stockpile is enough to cover its expenses 2 or 3 times over? That means the company has enough cash that if it didn’t receive any revenue for the next year, it will still probably survive the coming recession. That means any dip in price might be an opportunity to buy. But if the company doesn’t have enough cash? Well, I’d cut it from my portfolio. 

The above is a drastic oversimplification (back off, accounting pedants!)...

But it gives you a quick and easy way to avoid companies that might potentially go bankrupt in the coming months or years…

And it also gives you a quick and easy way to decide if you should buy MORE of a growth stock if the price drops for any reason. 

There, now you’re kitted out with everything you need to know to survive and even thrive during the next recession…

And you don’t even need to touch any brass bull balls.