Zach Scheidt: I’m Changing My Tone.
My conversation with Dave Gonigam caught me a bit off guard.
“Zach, I like reading your work. But I wish you weren’t so darn BULLISH all the time!”
And so began a lively discussion about where we are in the market cycle, what investors can expect in the months ahead, and how best to protect one’s wealth.
(Dave, as you probably know, is the managing editor for The 5 Minute Forecast. One of the best daily newsletters — besides The Daily Edge of course — that our company publishes.)
Incidentally, my conversation with Dave helped me see that I need to change my tone when it comes to the market’s direction and the volatility we’re currently experiencing.
No, I’m not picking up camp and moving to the “doom and gloom” side of the ledger. In fact, I’m still “darn bullish,” as Dave would say.
I believe our economy is continuing to grow. I believe that opportunities abound for investors who know where to look for them. And I believe that America has the intestinal fortitude to do what needs to be done to ensure that our citizens are treated fairly (on both a social and economic level).
But with so many of you wondering what’s going on with the market’s pullback, I want to spend a bit of time today explaining how we got to this place, and covering the risks you need to be aware of.
The Wild Ride for Unbalanced Investors
Everyone knows you’re not supposed to put all of your eggs in one basket. In other words, you don’t want all of your wealth in one stock — or even in one specific area of the market.
But for better or worse, that’s the approach many investors have taken over the last few years.
And I’m not just talking about individual investors who get fixated on one particular stock. I’m `also talking about the big mutual fund managers who absolutely must invest in the hottest stocks if their returns are going to keep up with the market.
Of course, the hottest sector in the market for the past few years has been the tech sector. Midway through the summer, this sector made up 23 percent of the market and accounted for most of the big gains investors were seeing.1
In other words, institutional investors had to invest heavily in tech if they were going to beat the market. And that’s exactly what they did.
Now, the biggest drivers of the tech sector’s performance have been the so-called FANG stocks (named for Facebook, Amazon, Netflix and Alphabet’s Google). Take a look at how the FANG stocks have performed compared to the market over the past year.
The red line shows you how the overall market has traded for the past year. And keep in mind, the market is still heavily influenced by the FANG stocks.
The blue line, on the other hand, shows you how the FANG stocks just by themselves have performed. As you can see, it’s been an incredibly wild ride!
Now the sad part about this picture is that too many investors have been heavily weighted toward these speculative stocks. So now that these stocks are trading sharply lower, the majority of unbalanced investors are feeling the pain.
Finding Value in a Balanced Approach
Why are the FANG stocks getting hit so hard?
Well there are a lot of catalysts that we can point to. The trade war, rising interest rates, the “economic cycle” and more.
But what’s really in play right now is that these stocks got way too expensive. Investors were so eager to buy the most popular stocks that they didn’t care what price they had to pay to own the shares.
All of this energy was great as long as investors kept buying. But when the trade war fears, interest rate hikes, and other catalysts came into play, investors finally took a step back and started thinking about how much they were paying for these stocks.
Since these stocks were trading at very high prices compared to the earnings these companies were generating, the FANG stocks were the first to get sold when investors realized they needed to cut back on how much risk they were taking.
Of course, with the FANG stocks leading the technology sector… And with tech being the biggest sector in the broad market… A mass exodus from FANG stocks wound up pushing the market lower for everyone.
That’s the bad news.
But the good news is that beyond the carnage that FANG stocks have caused in the market, the rest of our economy is still very strong. Which brings me back to my “so darn bullish” perspective.
Back to my Conversation with Dave…
As Dave and I wrapped up our conversation, one thing became apparent to me.
I need to do a better job explaining what it means to be bullish on our economy, while still protecting the wealth you’ve worked so hard to accumulate.
And while there are so many areas of the market that offer opportunity to us right now, there are certainly some land mines too. (We haven’t been fans of the FANG stocks here at The Daily Edge, and we can continue to show you how to avoid dangerous situations like this.)
So as we head into the Thanksgiving holiday, I want to remind you that protecting your wealth should be your number one priority.
And to do that, it’s important to take a balanced approach to investing. That means allocating some of your wealth to precious metals (which are doing quite well right now). It means investing in bonds (which give you guaranteed payments regardless of what the market is doing). And it means owning different types of stocks (some that will hold up well, even when the market is pulling back).
The American economy is strong. Jobs continue to be available. Companies continue to grow earnings. And wages are on the rise.
I’m thankful for the plentiful opportunities that we have as investors. And I’m thankful to you for being part of The Daily Edge family.
Here’s to making great memories this Thanksgiving holiday, and to growing and protecting your wealth in the weeks and months to come.