Here’s a short list of asset classes that look especially risky into 2020
Thanksgiving weekend just passed. That means it is practically next year, right? Now, 2018’s final month was unusually dangerous. The S&P 500 fell 15% in 3 weeks, before bottoming on Christmas Eve. This time of year is typically more quiet than that. Either way, this is around the time that investors start to think ahead to the New Year.
I don’t personally subscribe to the concept of dividing a lifetime of investment efforts into neat, calendar year periods. After all, it is not a 12-month game. However, I am clearly in the minority.
So, in the spirit of unity, here is my early list of potential investment “turkeys” as we head into next calendar year. While any market segment can produce profits for your portfolio at any time, these few appear to me to present above-average risk as you pursue those profits.
These are based on a combination of technical (chart) observations as well as some conclusions I have drawn about the current and near-term fundamental and economic picture. Here they are.
The caveat here is that the price of oil actually looks like it could move higher into next year. The inflation picture, of which energy prices are a big part, generally looks to have some upside potential (i.e. higher inflation).
However, stock prices of certain segments of the energy business look increasingly difficult. And to me, “difficult” is not something we want to devote too much capital to when other market segments are in, shall we say, the holiday spirit.
What is potentially troubling is that the energy segments that look the weakest include things like Master Limited Partnerships (MLP), which are oil and gas pipeline companies, as well as smaller oil drilling firms. If I read between the lines, so to speak, that tells me that the market is starting to get concerned about corporate credit quality as we near 2020.
The diversified, mega-oil companies have the resources and structure to hang in much longer than those companies that are highly-leveraged. That is, they have a ton of debt on their books.
If this plays out as it looks like it could, it would be a tip of the iceberg situation for other industries, and eventually for the market in general. But we are not there just yet.
Whereas certain parts of the energy business are concerning due to specific credit conditions in that market area, U.S. Treasury and other higher-quality bond types (Investment Grade Corporate and Muni Bonds, etc.) look tenuous for a very different reason. That is, they have had historically high price moves since late last year. Long-term bond prices have had strong double-digit gains over that time. That’s unusual, though expected when interest rates dive as they did earlier this year.
Still, that move lower in long-term rates appears to be at risk of reversing itself. That would make next year one in which the “40%” part of those dreaded “60/40 portfolios” could deliver the type of hangover associated with the day after Thanksgiving.
Gold and silver stocks have had nice runs higher in 2019. This followed a long period where they were about as relevant as an 8th round draft pick in the NFL (since there are only 7 rounds in the NFL draft). But as with high-quality bonds, these market segments may have gone too far, too fast. They are classic areas for speculators, and that leaves them vulnerable to over-shoots and under-shoots. I still see gold as a decent long-term contributor to diversified portfolios. But, as always, it is not a matter of yes or no, but how much to allocate. As I see it, whatever your allocation was to precious metal stocks 6 months ago, you should consider having a lower allocation than that today.
Enjoy the turkey, but beware of potential turkeys in your investment portfolio. If you are not careful, they can gobble up your wealth.
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