Whither the stock market?
There may well be dark days ahead. The economy might plummet into a chasm that anyone under 90 years old cannot imagine. Can it really get worse than today's 1.5% GDP growth and 8.2% (some say it's really 14%) unemployment rate?
It can, though few can envisage it. Even the esteemed Barton Biggs, who died on July 14 at age 79, pleaded guilty as "a child of the bull market." He was acknowledging that his career had encompassed only the rewarding nature of the stock market, in which buying opportunities invariably present themselves because stocks indefatigably rise after normal pullbacks.
Had he hung on a bit longer, however, Mr. Biggs might have witnessed something more akin to the 1930s, and certainly more serious than our more recent troubles, popularly and prematurely tagged, "The Great Recession." Or so suggest three mavens of note.
Former Reagan Administration Budget Director David Stockman, the guy who was famously taken to the woodshed by the president, embarked on a successful private-equity career in the years following his White House stint. Today, however, he's pulled in his wings as far as he can - he holds nothing but cash and a little gold.
"I wouldn't touch the stock market with a 100-foot pole," he says. "Capital preservation is what your first, second and third priority ought to be in a system that is so jerry-built, so fragile, so exposed to major breakdown."
Economic writer A. Gary Shilling confesses to his reputation as a "gloomy Gus," while insisting it's undeserved. Rather, he says, his persistent pessimism has been warranted and proven correct, particularly his 2005 call about the housing bubble. (His current bubble call is for social media stocks, with the disastrous Facebook IPO serving as the first falling domino.)
Shilling declares that we may already be in another recession. A bottom in housing prices? Far from it, he responds, predicting another 20% drop. Even more startling is his expectation of a 40% stock market decline.
Another prominent wet blanket is Pimco founder Bill Gross, who is only slightly more sanguine, allowing that "the bunker portfolio lies further ahead." Still, he is extraordinarily cautious, noting that deleveraging - the unwinding of decades of sovereign, corporate and personal debt - could last up to 15 years, he says.
These are not three trifling voices, but their cautions will fall on the deaf ears of today's children of the bull market, who can't fathom a protracted, multi-year downturn. I don't know who's right, but I know whom I respect. And I know that what I've been doing is what I'm going to continue to do. It's proven more than just a little satisfactory.
Just over a year ago, I designed this portfolio to replicate long-term, stock market returns by pairing high-yielding, low volatility securities with a stable component of short-term bonds. It currently consists of a 45% allocation to mortgage real estate investment trusts, such as American Capital Agency (AGNC), CYS Investments (CYS) and Capstead Mortgage (CMO), and a nearly equivalent allocation to short-term bond ETFs, like Vanguard Short-Term Corporate Bond Index (VCSH). The results have been as hoped. The 365-day return on the model has been 18%, compared to a return of 4.2% for the S&P 500 Index (through July 26, 2012).
I don't know whether the stock market will take off in this election year, but like Messrs. Stockman, Shilling and Gross, I'm not optimistic. Of course, they have been roundly castigated (as now I will be) for their forebodings. Nobody wants to believe it, and investors innumerable have long been whipsawed by rogue pundits proclaiming that "it's different this time."
Such Chicken Littles are understandably ignored. It consistently hasn't been different. And it won't be until it is.
Source for portfolio and index returns is Covestor.com. This commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities.
Additional disclosure: Gerard Wealth Management, Inc. holds positions in each of the securities referenced in the Stable High Yield model at Covestor.com.