Dec 212018
 

Stock markets are down around the world in December. The Nasdaq Composite which is a barometer for tech companies has fallen 15% so far this month. Top economists and investors have been sounding the alarm for months on an economic recession. A New York Times survey discovered that 48% of business leaders at the Yale CEO Summit expected a recession to strike by the end of 2019. It said this finding was the “direst yet,” and shows just how worried companies are about an imminent recession. 😮

The S&P/500 is already in a bear market, which means it has dropped at least 20% from the last highest point. The Canadian S&P/TSX Composite index is only down 18% since its high point in July. But it could very easily enter bear market territory by next week.

Recently 82% of corporate CFOs surveyed in the Duke Global Business Outlook saw a recession starting before the end of 2020. But nearly half of them believe it will actually occur by the end of 2019.

A little pullback once in awhile is normal. When you have nearly 10 years of financial growth it shouldn’t be a surprise when growth finally decelerates. That’s why it’s necessary to always maintain a recession resistant financial plan. 🙂

The writing has been on the wall for a long time. About a year ago I explained how we are near the end of an economic cycle, and by using some charts, I predicted that the next financial downturn will probably happen sometime between 2019 and 2021. So I’m in agreement with most of the business people surveyed above.

Instead of choosing stocks that are largely recession proof, the best way to protect ourselves from a falling stock market is to own other types of investments such as bonds or prime real estate. Continuing to earn a steady stream of income also helps bolster one’s financial situation. Only 1/3rd of my assets are in stocks. So despite the double digit stock market pullback, my net worth is only down about 1% compared to July.

It is hard to know whether this current trend will continue to push stocks further down, or if we will see a bounce back soon. If I had to guess, I think there is still some time to prepare before things start to look really bad. Here’s a chart that shows the change in corporate income tax the U.S. government earned over the last 50 years. ~Notice how just about every time the line drops below the 0 point and reverses direction we see a vertical grey bar? Well those bars represent times of recession (or shrinking GDP.)

corporate income tax

At this moment the U.S. could already be in the beginning of a recession. We won’t know for sure until the economic data is released many months later. But what we can determine right now is that the line has crossed below 0, and it hasn’t reversed direction yet. That’s why I think the next financial downturn will not be this year. 🙂

But in the meanwhile I am being weary and staying away from buying new stocks. It’s not a good idea to catch a falling knife, as a stock market in decline is most likely to continue falling in the immediate future. So I will be enjoying the holidays sitting on the sidelines. At the same time I am also not selling any of my stocks. And lastly I am continuing to pay down debts, saving up cash, and looking at bonds. 🙂

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Random Useless Fact:

Mar 202018
 

Most stock market investors will find it nerve-racking to see their portfolios drop by 50% or more. But a large stock market crash is usually beneficial for our long term finances and we should welcome a bear market sooner rather than later or even not at all. 😀

How an early stock market crash creates more wealth

During a stock market correction, all the new money we invest will be used to purchase assets at cheaper levels. 🙂 These investments can have more time to compound and grow.

Even if we somehow could avoid a bear market for the next 30 years, [our] retirement wealth would likely be substantially better if we instead experienced an immediate bear market. ~Mark Hulbert

Most people my age will probably retire around 60 years old. That gives us about 30 more years to save for retirement. I found a chart below, courtesy of Mark Hulbert from MarketWatch that shows how the timing of a stock market crash affects the value of a retirement portfolio. It assumes a constant annual rate of return for 30 years, except a brief period where the stock market crashes similar to what happened in the 2007/2008 global financial crisis.

The red bar at the far left of the graph represents the portfolio’s value at the end of 30 years if a stock market crash happens right now in 2018. The far right is when it happens near the end of the 30 year period. In all cases plotted on the graph, the average annualized return for the 30 year period is the same, which is 5.9%. The only difference is when that market correction occurred along the way. 😉

As we can clearly see, our portfolio’s value 30 years from now will be highest ($4.3 million) if a downturn happens immediately, and lowest ($1.9 million) if it happens right before we retire. Wow! We will have $2.4 million more if a major bear market breaks out now, rather than later, even when the overall annualized investment return is the same. That’s a huge difference. 🙂

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Jan 292018
 

The Next Recession is Coming

Although not directly correlated to the stock market in the short term, the economy also experiences cycles of ups and downs. Here are some graphs that have historically been very reliable when used to forecast recessions in the United States. Recessions occur when the total economic output of the country declines in two consecutive 3-month periods.

The Yield Curve is Flattening

The graph below shows the difference between the 10 year treasury yield and the 2 year treasury yield. The yield curve tends to get flatter when the economy reaches the end of an expansion phase. The vertical gray bars on the graph represent periods of recession. Every time the yield difference falls below 0% a recession happens soon after. Looking at the chart it appears we’re approaching 0% again.

 

 

Unemployment Rate Nearing A Turning Point

A lower unemployment rate is good for the economy. But at the end of every full employment cycle is a sharp increase in the civilian unemployment rate, usually accompanied by a recession. In the past a long period of declining unemployment rate has always lead to a spike up and a recession.

This rate has fallen from 10% eight years ago to 4% today. Practically speaking it cannot go much lower than this. The lowest the rate has been over the last 60 years is 3.5%. So this downward trend in the civilian unemployment rate is almost over. It’s not hard to imagine what will follow after the rate stops heading lower.

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Apr 112016
 

The New York stock exchange regularly releases information about how much margin (or debt) investors are using to invest. Based on the latest reports from the NYSE market data, Doug Short who writes for advisorperspectives put together the following graph which conveniently compares the credit balance of investor’s accounts to the S&P 500 over the past two decades. We can clearly see some correlation between the two sets of data.

16-04-investor-credit-margin-stock-nyse

The blue dotted line represents the nominal performance of the stock market index since 1995. The set of red and green bars represents the net credit balance inside investors’ accounts. This credit balance is basically the sum of free credit in cash and margin accounts, minus margin debt. Red bars show that investors have negative credit balances (borrowing money to invest,) and green bars mean they have excess cash or credit.

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Sep 022015
 

The R Word

Stock markets fell about 5% in August and my assets have dropped in value. Canada is technically in a recession now. 🙁 Oy vey.

But we investors are deep thinkers. For example, if pencils came with erasers at both ends, what would be the point? ? So we understand that recessions are necessary for economic growth to be meaningful. The boom and bust cycle is what makes the economy interesting because it creates long-term opportunities to those who are prepared. Besides, why is a recession so bad anyway? It makes the cost of living less expensive, which is good if you’re a consumer. 😀

*Side Income:

  • Part-Time Work = $800
  • Dividends = $500
*Discretionary Spending:
  • Fun = $400
  • Debt Interest = $1400

*Net Worth: (MoM)15-08-networth-chart

  • Assets: = $898,700 total (-4900)
  • Cash = $3,000 (-500)
  • Stocks CDN =$88,800 (-3700)
  • Stocks US = $65,500 (-5300)
  • RRSP = $56,400 (+4600)
  • MICs = $15,000
  • Home = $259,000
  • Farms = $411,000
  • Debts: = $504,700 total (-2400)
  • Mortgage = $192,600 (-400)
  • Farm Loans = $199,800 (-400)
  • Margin Loan CDN = $28,900 (-1000)
  • Margin Loan US = $27,200 (+500)
  • TD Line of Credit = $25,000  (-500)
  • CIBC Line of Credit = $10,000
  • HELOC = $18,200
  • RRSP Loans = $3,000 (-600)

*Total Net Worth = $394,000 (-$2,500 / -0.6%)
All numbers above are in $CDN. Conversion rate used: 1.00 CAD = 0.76 USD

It will be interesting to see how markets perform over the fall. September and October are historically the worst months to be a stock investor, lol. I’m just glad I still have a job, unlike so many people in Alberta right now. 😐

Embracing the Recession

Recession tends to have a negative connotation because people associate it with job losses, falling profits, and high unemployment. But for a large part of the population recessions can be quite beneficial. Retirees and the financially independent should embrace recessions. 😉 They don’t have to worry about losing their jobs since they don’t have any to begin with. High unemployment means fewer of their friends and relatives are working, so they have more opportunities to socialize. With a slowing economy and deteriorating household incomes, there will be less competing buyers. 🙂 Falling profits mean cheaper prices! If you’re in the market to buy a house, low demand means more affordable options.

When the price of food, fuel, housing, and other goods falls it directly benefits everyone because we all have to eat and live somewhere. For the majority of us who are still employed a recession means we can spend less money, and save more for retirement. Personally I’m enjoying the cheap $1.20/L gasoline around here ⛽. I can’t even remember the last time gas was this cheap in Vancouver. 😀

15-09-petroleum-harry-potter

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