I have never completely sold out of stocks before, but I am seriously considering it.
I sold 64% of my stock portfolio on Feb. 5, 2016. I will have to pay tax on $50,000 in capital gains. I might sell more stock this week.
A global recession is coming. Countries around the world are suffering from deflation of commodity prices. Oil prices have fallen from $100 per barrel to around $30 per barrel over the past 18 months. Prices of nearly all commodities, including copper, coal, corn and soybeans, have fallen to near historic lows. China's economy has slowed from 7% annual GDP to somewhere around 2%. Europe's economy is struggling, especially Italy, Greece and Portugal.
The U.S. stock market as measured by the S&P 500 is up 250% since the bottom in March 2009. The U.S. economy is showing signs of struggles. Industrial production is declining. The railroads have been saying the industrial sector has been in a recession since spring 2015. Railroad volumes are down over -10%.
A key gauge of US manufacturing activity -- the ISM Manufacturing Index -- has slipped back into negative territory. Each of the last two big bear markets were preceded by a drop of the ISM Manufacturing Index into contraction territory, in August 2000 and December 2007.
Retail sales are also struggling. U.S. retail sales for December 2015 were $448.1 billion, a decrease of 0.1 percent (±0.5%) from the previous month, and 2.2 percent (±0.7%) above December 2014. I believe Amazon and other online retailers are taking away sales from brick-and-mortar retail stores. Some of the best retailers out there are struggling. A case in point: The Buckle reported same-store sales for December 2015 were down 5.4%. Same-store sales in January 2016 fell 11.3% compared with the same month a year ago. During the last recession of 2008-09, The Buckle's same-store sales were actually growing. But in recent years the retailer has been struggling.
U.S. GDP grew an anemic 0.7% in the fourth quarter of 2015. I suspect first quarter 2016 may see a contraction in GDP.
Many oil and gas companies are going broke. We will see record bankruptcies in oil and gas this year. Last year, the oil companies begged and borrowed from banks and investors in order to stay alive, with the hope the oil price would recover, but it did not. Oil prices could fall to $12 per barrel like in 1999. There was a huge bubble created in the fracking sector. North Dakota was one of the fastest growing regional economies from 2010 to 2015. That trend has reversed. Many big banks including Citi and Wells Fargo have huge loan portfolios in the energy sector. Many of these oil and gas companies will default on their loans. A case in point: SandRidge Energy (OTCPK:SDOC) used to be a $30 stock. It is now worth a few pennies. SandRidge is based in Oklahoma City, where many energy companies are based. Houston and Oklahoma City are facing big problems with the implosion of the energy bubble. Oklahoma City, Houston and North Dakota may see price declines in real estate.
Globally, the oil and gas industry has issued $1.4 trillion of bonds and taken out a further $1.6 trillion in syndicated loans, driving the sector's combined debt to $3 trillion, according to the Bank of International Settlements. The "illusion of sustainability" could quickly turn toxic as the credit cycle unravels, said The Telegraph.
Oil production is at all-time highs. Economic sanctions against Iran were recently lifted, allowing this Middle East country the opportunity to sell oil and gas to other countries. Countries like Venezuela -- which depend on oil exports for their livelihood -- are in trouble.
Be careful buying oil stocks. They may seem cheap, but they will get cheaper as bankruptcies in this sector make headlines this year. Many energy companies like Kinder Morgan (NYSE:KMI) have already cut their dividends. This trend will continue in 2016.
U.S. employment is not as healthy as the Fed would like us to believe. The unemployment rate hit 4.9% in January 2016. But the labor participation rate is horrible. Many people have dropped out of the labor market. Only 62.7% of adult Americans are working. The so-called Labor Force Participation rate hasn't been this low since the late 1970s. The rate measures how many people over age 16 are working or actively seeking work. I personally know many people who work only part-time jobs because they could not find full-time work.
Central banks have no power to stop the contraction in the world economy and the stock markets. The Fed raised interest rates on overnight banking loans from 0% to 0.25% in December, but interest rates in Europe are actually negative. Quantitative easing and the buying of government bonds has already ballooned central bank balance sheets to unprecedented levels.
Bankers in Topeka tell me their customers are not increasing their debts. Bank balance sheets here actually contracted over the past seven years as customers paid down debt and increased their savings.
Be afraid of fear and panic. Many investors have been through two major stock downturns (2000-01 and 2008-09), and they don't want to go through it again. I know a Waddell & Reed advisor who got in the business in 2000. His first clients bought stock in 2000 and quickly saw their portfolios go down. He encouraged them to hang on. By 2007, they were doing OK, having re-gained their principal. But by 2009, they had lost 40% of their stock values. It wasn't until 2012, that they had recovered from their losses. So in a sense, those investors suffered a lost decade. Investors who are now in their 50s and 60s want to preserve their portfolios and may panic in the near future and sell out of their stocks.
I know a shrewd investor who sold out of stocks in 1999 and moved into bonds. That investor did amazingly well. He was able to retire to his cabin in Minnesota. He's still retired. But most people plodded along and did nothing.
It only takes a couple of days to lose 5% to 10% of stock values. Stocks with high Price-to-Earnings ratios will plunge massively, but I suspect all stocks will suffer.
What you can do? Consider taking profits on high-flying stocks with high P/E ratios.
Talk to your financial advisor. I see too many investors with portfolios heavily weighted in stocks and very few bonds.
Consider using a stock market crash to your advantage. We may see an oversold situation that allows for you to buy stocks very cheap. In 2008-09, I was buying stocks every month; it was a golden opportunity. Both my wife and I were working and saving money and buying stocks with the idea that we need to build our retirement savings. Well, it worked, we made a lot of money and now I don't want to lose it. Preservation of capital is more important to me than growth right now.
I am not selling my railroad bonds. Bonds are expensive right now as the 10-year Treasury is at 1.85%. I plan to sit on cash for a long time, possibly a year. If the stock market crashes 40%, I may start buying stocks again, but only in small amounts. I may buy some municipal bonds if their prices improve. I will stay away from Puerto Rico's municipal bonds because of impending defaults there. I like municipal bonds from cities like Omaha, Kansas City and Minneapolis.
Good luck to all you investors.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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