Nick’s Note: 2018 will go down as the worst-performing year for the market since the 2008 financial crisis. But does that mean the decade-long bull run is over?
That’s why I called PBRG guru and former hedge fund manager Teeka Tiwari, who’s seen his share of market cycles over the past 30 years. (As he often says, this “isn’t his first rodeo.”)
In today’s interview, Teeka gives me his 2019 market forecast and tells me how he’s positioning his portfolio to deal with increased risk…
By Nick Rokke, analyst, The Palm Beach Daily
Nick: The market corrected in the final quarter of 2018. In fact, after reaching all-time highs in September… 2018 turned out to be the worst-performing year since the 2008 financial crisis.
Some people think stocks are too expensive now, and that means the decade-long bull market is coming to an end. Can the good times continue rolling in 2019?
Teeka: They could, but there are a couple factors to be aware of.
First, I want to say… Just because U.S. equities are expensive relative to their historical prices, doesn’t mean the market will go down. Stocks can stay expensive for a long time.
I learned a long time ago that valuation alone isn’t a reason to exit the stock market. You can just look at what happened in the tech boom in the 1990s. Stocks were expensive, but they got a lot more expensive.
Valuation becomes a problem when people become fearful that economic growth could slow down. And that’s why we saw the pullback in the fourth quarter of 2018.
One factor that could cause a slowdown is the trade war with China. Are we going to have this tariff war or not? The outcome is going to have a major impact on the market. If we do have a trade war, I don’t see how you can avoid an economic slowdown in 2019.
I’m not talking about a recession, though—but a slowdown. If we go from 4% GDP growth to 1.5% growth, that will feel bad. And the market will reprice.
Nick: Are there any other factors that can slow down growth?
Teeka: Yes. The second factor worrying everyone is interest rates. Now, I’m not worried about interest rates—yet. But others are. And what other people think matters—at least in the short-term.
The yield on the 10-year Treasury is abnormally low. It’s hovering around 3%. For the last century, it has historically yielded 6%.
My research shows that economic growth isn’t stunted when we go from an abnormally low interest rate—like we have now—to a normal rate. The economy still grows, and the stock market still rises.
The economy only slows when interest rates go from a normal rate to a high rate. That’s when we start to see problems.
Nick: Knowing that, what should an investor do?
Teeka: I’m telling my Palm Beach Letter subscribers that it’s time to be cautious.
This isn’t like three years ago when you could buy almost any stock and it would go up.
So until we can get a definitive announcement on where we are with tariffs, we should remain cautious.
At the G20 Summit in Argentina at the end of last year, President Trump said he had a 90-day agreement with China to suspend certain tariffs. But that’s meaningless. We need a real, legitimate agreement.
And until that happens, we’re taking some risk out of our portfolio.
Nick: Does that mean you’re selling a bunch of positions?
Teeka: We only sell positions when they stop out. We like to let our winners run as far as they can—because quite often, stocks go higher than you think they will.
That being said, in The Palm Beach Letter portfolio, we got stopped out of 23 trades for an average realized gain of 35%. Most of those names have gone lower, so our stop-loss strategy has been great at keeping us protected.
But losing that many positions so quickly worries me. The last time I saw this kind of wholesale liquidation in a portfolio was during the time going into 2007.
Now, I’m not suggesting we’re on the verge of another financial crisis… But we’re far along in the cycle. So I want to de-risk the portfolio.
Selling positions that hit their stops is one way of preserving your capital. And I’m thinking about capital preservation right now.
Nick: So where can investors find safety in 2019?
Teeka: I’m looking for hedged assets or an alternative asset that provides income.
I’m excited about the possibilities with those products. And I’m working to get unique, alternative plays like that to our subscribers in 2019.
I know that sounds cryptic, but I can’t give away too much right now. My team and I are working on a way to buy into hot sectors that are currently weak—but to do so without taking any risk to our principals.
Nick: Sounds great… I’d love to get into something like that, too. I’ll be one of many waiting for the opportunity. Thanks for your time, T.
Teeka: You’re welcome.
Nick’s Note: In tomorrow’s Daily, Teeka will give his 2019 crypto forecast—so stay tuned. And if you have any questions or comments for our editors, send them to us right here…
America has a new super fuel.
This new fuel source was first discovered in Idaho… in a little-known area in Lemhi County.
And President Trump—through several executive orders—has opened up over 2 million acres of land in Utah where deposits of this super fuel can be found…