A Big Fat Bear Ahead?

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 |  Includes: ABT, BAC, BMY, C, CLF, GLD, GS, LLY, MRK, MS, PFE, QQQ, RF, SLV, SPY, TLT
by: BubbleBustInvesting

Everyone watching CNBC news, reading the Wall Street Journal, and Barron’s, anxious to get clues about the next stage of today’s torturous equity markets has probably come across a standard expert advice: “Don’t worry, in the long-term, equity markets always come back, outperforming every other asset category.”

While this is a well-searched proposition in the finance discipline (provided that dividends are re-invested), it isn’t always true. The performance of Japanese stocks over the last twenty years is a case in point. After a meteoric rise in the 1980s, the Nikkei Index is down 80 percent (not counting for a roughly 1.5 percent dividend)— around its 1980 level. Yes, 80 percent decline over twenty years! This means that investors who invested 100 yen in 1980 (the beginning of the bubble) are expected to see their money doubled in 2040, while investors who invested 100 yen in 1989 (the peak year) will see their money doubled sometime at the end of this century! The problem, however, is neither group will be around by that time.

Undoubtedly, some of Japan’s problems are unique, like its heavy reliance on exports, hammered by the rapidly appreciating yen, and negative demographics that have depressed consumer spending; others aren’t. In fact, the parallels between what happened in Japan in the 1980s and the 1990s and what happened in the US in the 2000s and the early 2010s are too similar to ignore: The blow and burst of residential and commercial real estate bubbles; the massive monetary and fiscal stimulus that kept the two economies off the cliff but failed to stir them back to la ong-term growth path; and the heavy sovereign debt fiscal stimulus has left. This means that the US is running the risk of entering a prolonged bear market, where old adages do not apply. What should investors do?

First, diversify across asset categories, rather than just across stocks. For instance, buy shares of SPDR S&P500 (SPY), Power Shares QQQ (QQQ) and IShares 20 year Treasury bonds (TLT). More sophisticated investors may want to buy puts on SPY and QQQ long positions they hold.

Second, stay away from SPDR Gold (GLD) and Ishares Silver Trust (SLV), as well as, economically sensitive companies like Walter Industries and Cleaned Cliff (CLF); and banks like Bank of America (BAC), and Citigroup (C), and Regions Financial (RF) Morgan Stanley (MS) and Goldman (GS) that were at the center of the financial crisis.

Third, stay with pharmaceuticals like Pfizer (PFE), Bristol Mayer’s Squibb (BMY), Abbott Laboratories (ABT), Eli Lily (LLY) and Merck (MRK) that are non-cyclical and pay good dividends.

Disclosure: I may hold both short and long positions of any security mentioned; may change positions at any time.