Stocks Fall, Bonds and Gold Rally Sharply

U.S. stock prices fell today by about 2% across the broad gauges of measurement; Dow Jones, S&P 500 and Nasdaq markets. That's quite a hit for just one day. However, unless you live in a cave, or under a rock - you have to know that the stock market has been performing rather well the past few years.

If all your money is in the stock market - which is not common for most folks, then your gains or losses today would be different than what the media reports on the nightly news tonight.

Before today's action, stocks were ahead 8% on the year. Today they are 2% less, so we're about +6% year-to-date.

If most folks don't own all stocks, what do they own? A normal, balanced portfolio would own some bonds, and some fixed interest investments (CD's and fixed annuities, or cash), and perhaps some contrarian - asset like silver or gold.

We own bonds and gold in all client portfolios, and like to see it offset the risks of an all-stock portfolio. It has proven itself over 40 + years.

Today, Gold rocketed up $25 an ounce - that's +2%.

And bonds; they rose also as prices rose from demand that was leaving stocks today. Interest rates fell quite a bit: The popular bond funds and ETF's gained between 1/2 percent and 1% - a huge gain on one day for a bond investment!

All said and done, if we look at a diversified portfolio, stocks fell 2%, bonds gained about 1%, Gold gained 2% and cash under the mattress is still all there. If you held all 4 of these "buckets" of money with $100,000 total, you gained $250 today !

We always advocate a balanced approach to investing; it keeps the stress lower and we can sleep well at night.

Contact me for further information on our money management and planning services. Thanks for reading!

~Barry Unterbrink
(954) 719-1151

An Historic Day in 1932

July 8th, 1932, a historically significant day in the USA's financial system.

A rather obscure factoid, it marked the day that the stock market fell to a low never to be evidenced since. 

Most remember the 1929 stock market crash, which touched off the 10-year Great Depression. The crash affected all Western industrialized countries. If you are in mid-life, either your parents or grandparents experienced this dreary time for the USA first-hand. Ask them about that sometime.

From it's high near 400 on the Dow Jones Industrials Average in 1929, the stock market FELL 89% in value to close at 41.22 on July 8th, 1932.

Given today's Dow Jones level of near 18,000; that same decline would take us down to Dow Jones 2,000 !


I'm certainly not predicting that same outcome in the future, but I am not ruling it out entirely.

It would take 25 years for the 1929 stock market highs to be seen again, in late 1954.

Gold's Role as Stock Market Insurance

by Barry Unterbrink

A minority of the population understands that gold is a monetary asset that should be held as wealth insurance. A larger percentage of the population is confused about gold because of mainstream sources of information many people consider gold a risky investment when in fact gold bullion is not an investment of all a rather money itself just like any Fiat currency held in a vault, gold does not pay interest or dividends.

It is important to understand the role of gold as money in relation to Fiat currency. Governments and banks work hard to ensure that people remain confident in their debt backed paper currencies, and the economy in general. Financing is Wall Street's lifeblood, so it will always seek green shoots of recovery around the corner just as it did in 1929, 2000, and 2008. Consumer spending and bank lending is what keeps the Fiat shell game going and people do not borrow or spend when they feel uncertain about their financial future.
There are three essential characteristics of money: it must be a store of value; it must be accepted as a medium of exchange; and it must be a unit of account, meaning that it must be divisible in each unit must be equivalent. Fiat currency has failed as a store of value and it has no intrinsic worth. How much does it cost to type and zeros on the computer screen or on a piece of paper?

Certainly less than it does today a drill a mile into the earth and extract and refine 2 grams of gold from a ton of rock. The U.S. Federal Reserve was created in 1913. From its creation through to this day, the U.S. dollar has lost approximately 98% of its purchasing power. On the other hand,  Gold has retained its purchasing power rising from around $21 an ounce in 1913 to $1,300 today. Through the ages, whether in Roman times, in 1913 or today, 1 ounce of gold has at least provided a man with a pair of shoes, a custom suit, and a briefcase, or the equivalent.

Gold as Stock Portfolio Insurance

Gold is the closest most negatively correlated asset to traditional financial assets such as stocks and bonds. Physical gold bullion should be a significant part of the strategic long-term allocation within a diversified portfolio. Wall Street pundits and the uneducated media regularly dismiss Gold, and other commodities as speculation, not to be owned for most investors. Do they know – or have taken any time – to research Gold’s role in a portfolio; to dig into the numbers and important relationships? 

We have looked at the Gold statistics over the past 40+ years, using publicly and historical information, and determined from the data that while Gold does not move in lock-step always to offset losses in stocks, it does show a very reliable pattern to mitigate losses in bad bear stock markets, and during times of high inflation. Your amount of assets in Gold should be your decision, based on your individual needs with your money; income needs, withdrawal rates, capital gains, liquidity, etc.

 

The Case for Gold Ownership 1972 - 2015

Note Golds surge after President Nixon took the U.S.A. off the Gold Standard in 1971, during which Gold's price was fixed at $35 an ounce. Stocks were entering a bear market, losing 40% during 1973 and 1974, while Gold skyrocketed almost 4 times in price, rising from $40 to $160.

Then a few years later, in 1978, we were hit with an Oil Embargo (remember gas rationing?), which started 4 years of high prices (inflation), which hurt the U.S. Dollar’s purchasing power. From 1978 through 1981, inflation ramped up a combined 50%. Gold prices rose +135%.

Fast forward to the next major bear market, known as DOT COM. This referred to the period at the turn of the century, 2000, where the Internet funding craze ramped up to unprecedented levels. Public offerings of Initial Public Offering shares in the technology sector met with wide-open pocketbooks with individual investors and institutions alike clamoring for ginormous profits. In the five years ending in 1999, when the DOT COM craze finally ended, stocks gained 228%, while Gold also rose 55%. Then when stocks fell about 40% in 2000-2002, Gold participated also and rose 18%.

Gold then began a 10 year rally, with no losing years starting in 2003, rising from $350 to $1,650 an ounce into late 2012. So far, investors, doesn't it looks like Gold is helping a portfolio including stocks, especially when the stock market is falling in bear markets?

The last period to measure is the 2007-2008 era real estate-led bear market in housing prices and financial assets, causing the stock market to lose half its value in a short 17 months. This should be in most of our minds, if you were an investor or saver 8 years ago.

Gold had its best year in 2007 (up 30%) since the late 70’s, as it rose perhaps in anticipation of / and on the fears of the banking and lending fiasco that led up to the falling stock market.

During 2007-2009, stocks lost 15% in those 3 years, while Gold gained $450 an ounce (+70%).

Granted, the long term record also shows Gold’s poor showing the past three years; being down sharply.  Is this cause for concern? We feel the roughly 40% decline in Gold prices since 2013 are due to super low interest rates competing with the no-dividend paying precious yellow, and a decent stock market. Owning Gold through 2015 was a drag on your returns in a diversified portfolio. Stocks gained about 45% the past three years. That's a healthy clip.

So the take-away here is that Gold is reliable for mitigating losses when stocks are down sharply, and when Gold really tanks, stocks usually have a a great year (1975, '83, '91, '97, '13) or at least stocks provide a nice offset to Gold's lesser declines, in years 1976, '88, '89, '96, '98, '14, '15.

Could the economic uncertainty (Brexit vote) and renewed price gains in Gold this year, up $250 an ounce, or +22%, be a precursor to an even worse stock market ahead in the second half? We’re not sure, but we are not selling our allocation to Gold for ourselves or our client accounts. Any geopolitical risks should only add to the demand for histories most popular precious metal, GOLD.

   

Stay Diversified My Friends

Bonds and Gold have held off the red ink thus far in diversified portfolios.

An equal mix of stocks (S&P 500), bonds (20 yr T-Bond), Cash and Gold has produced a positive return through today of +4.3%. The full tally.

Stocks  - 5.5%
Bonds  + 8%
Cash    +0%
Gold   +15%

What You Should Know About a Bear Market, by Paul Merriman

Paul Merriman is a fellow advisor and this is a very relevant topic in today's market. ~Barry

Editor’s note: Paul Merriman originally published this column in early August, 2015 Then last week, Aug.24-28, stocks had their worst showing in four years. The Dow Jones Industrial Average closed Friday in correction territory, generally defined as a 10% drop from its most recent high. On Monday, August 24th, the Dow Jones Industrial Average quickly fell more than 900 points, topping the 530-point drop on Friday.

The carnage in the Nasdaq Composite has been far worse, with the index plunging more than 8% in early trade. With that in mind, here are his thoughts on what readers need to know about bear markets.

The last several years have been quite kind to equity investors, probably lulling too many of them into a false sense of security. But a bear market is almost certainly on its way. I can't tell you when it will show up. I can't tell you how severe it will be. I can't tell you how long it will last.

But I am pretty sure that the bear will pay us a visit sometime in the next year or two. I'm also quite sure that investors who are familiar with bears (bear markets, that is) will fare better than those who aren't.

So here, in no particular order, are 22 things I think every investor should know about bear markets.

1. What is a bear market? The term is sometimes thrown around loosely. But there's a real definition that's generally agreed on: A bear market is a downturn of 20% or more, lasting at least 60 days, in any broad equity index such as the Dow Jones Industrial Average, the S&P 500, or the Nasdaq. (Figures cited in this column apply to the S&P 500.)

2. If the 20%-plus downturn lasts less than two months, it's considered a correction instead of a bear market. (This doesn't mean it hurts less, but the pain starts easing up sooner.)

3. A bear market is triggered when investors lose faith in the market as a whole — decreasing the demand for stocks. This tends to happen when the economy enters a recession, unemployment is high and inflation is rising.

4. Bear markets are normal, but not predominant. Over the past 200 years, the stock market has risen more than it has declined. The bear accounts for only a minority of the history of the market — but that minority is pretty unpleasant.

5. Like earthquakes, bear markets are hard to predict, but especially hazardous to those who fail to prepare. Since 1929, the U.S. stock market has experienced 25 bear markets, an average of one every 3.4 years.

6. Statistically, we are overdue. The most recent bear market ended in March 2009 — more than six years ago.

7. Also like earthquakes, bear markets don't last forever. Those 25 bear markets lasted, on average, for 10 months.

8. Also like earthquakes, bear markets can be relatively mild or quite harsh. The average bear-market loss was 35%. The smallest loss was 21% in 1949; the worst was a drop of 62% from November 1931 to June 1932.

9. Many of today's investors have lived through two fairly nasty bears: a decline of 58% from 2000 to 2002 and a 57% plunge from 2007 to 2009.

10. Bear markets spook investors who aren't prepared for them. Millions of investors are still nervously on the sidelines following the market rout of 2008. By remaining in cash, they have missed out on a strong, sustained recovery

11. The history of the markets isn't entirely bad. The 25 bull markets since 1929 have lasted an average of 31 months — three times as long as the average bear market. Also encouraging: The average of these bull markets sent stocks up 107%.

12. Like bear markets, bull markets come in all sizes. The smallest bull-market gain was 21%; the largest was (hang onto your hat) 582%, from 1987 to 2000. That prolonged bull market started right after a sudden correction (widely regarded at the time as a crash) in which the market lost 22% in just one day.

13. The bear's bite isn't quite as bad as these numbers make it seem. For technical reasons, the returns cited here were computed without taking reinvested dividends into account. That means the losses were actually slightly less, and the gains slightly more, than the numbers would indicate.

14. Just as a bear market can scare off investors, a prolonged bull market can lead investors to think that market risk is nothing but an outmoded concept. Early in 2000, after nearly 13 years of a bull, millions of investors were stunned when a serious downturn began in the spring.

15. Bear markets don't last forever. I'm not saying it couldn't happen, but it hasn't happened yet. Perhaps the main reason is that broad market indexes are made up of so many stocks.

16. I know of one guaranteed way to absolutely protect yourself from a bear market: Don't ever invest in equities. However, this guaranteed protection has a high cost: You'll never obtain the gains from bull markets.

17. A better way to protect your assets is to diversify among many equity asset classes. This worked very well from 2000 to 2002: while the S&P 500 dropped more than 50%, my recommended equity portfolio fell only about 14%.

18. A third (and very effective) way to protect your portfolio from a bear market: Add bond funds. Over the past 45 years, the worst calendar-year performance for a combination of 40% diversified equities and 60% bonds was a loss of 14.9%, in the devastating year of 2008.

19. Better than either 17 or 18: Do them both.

20. Young people should welcome the bear. This sounds counterintuitive, I know. But young investors are blessed with lots of time. They need the long-term growth that results from buying stocks when they are less expensive so they can (eventually) sell them when they're worth much more. A bear market makes stocks (temporarily) less expensive; this is when young investors should be buying all they can.

21. New retirees, on the other hand, should be particularly wary of the bear. If you retire just before the start of a bear market, the decline will rob you not only of a big chunk of your life savings after you have lost much of your ability to replace them. It may also rob you of the confidence to remain invested in equities, which retirees need to stay ahead of inflation.

22. Bull markets and bear markets look pretty dramatic when you see them in a graph. This article, though it's a couple of years old, contains a chart that does a wonderful job of showing what I mean.
The point of all this information isn't to depress you, but to warn you. After a long bull run, it's easy to get complacent. Don't do it.
My advice is simple: Keep your expectations in check, be patient, and take the long view.