Every generation has its own set of investment paradigms that they grew up with. There was a time when the stock market was just going sideways, and the bond market was king. When central bankers around the world started to unleash low interest rates on their citizens globally, it was a time to flood the markets with cheap debt that allowed many ideas to become companies, businesses, real estate projects, and the like.
Sometimes there were bubbles like real estate bubbles, the dot com bubble, and other asset bubbles where speculative mania reigned because money was easy to get. Those periods ran for several years. For many below a certain age, that’s all they’ve known. Low interest rates and cheap debt. “Buy the dip.” Very liquid markets. High flying stock markets. Hence the 60-40 equities to bond portfolio “rule” was born.
Unfortunately that “rule” on a 60-40 stocks and bonds allocation and “buy the dip” may no longer be the case. Because governments worldwide pumped so much money into their economies into the hands of their citizens during the pandemic, a lot of people could afford goods and services easily, and thus prices and inflation rose.
Over the past few years, the stock market has been the investment vehicle that has captured the popular imagination. Especially the NASDAQ 100. The past few decades have seen unknown tech startups come out of nowhere and become multibillion dollar behemoths. Many millennials have only known that era, and not the earlier ones where the stock market just went sideways for a few years.
On the other hand, a lot of Gen Z and Alphas are very comfortable with digital assets like NFTs and crypto, since they’ve never known analog LP albums, cassette tapes, rotary payphones, and the like. However, most people who’ve grown up during the 50s, 60s, and 70s may say that digital assets are worth nothing. Again, it’s how you view the world.
Treasury bonds were seen as safe havens, but not something where you’d make your capital grow. Right now though, the current 4-5% yields are better than savings rates and have lower risk. Thus many depositors are pulling out of banks to invest in money markets that have treasuries, or they may be buying bonds directly. No one predicted that the Fed would suddenly raise rates by almost 500 basis points in a short period of time, and they’re not done yet.
Fans of real estate, who felt that owning properties were cash cows that collected rent can still do so right now. Unfortunately for those who own office spaces and shopping malls, there are fewer tenants and they are lessening the amount of space that they are renting. There are many factors like the Work from Home, Quiet Quitting, online shopping, and other trends that are causing half empty office spaces. Take note however that residential rentals are still doing well, precisely because there are fewer people who can take out higher interest rate mortgages right now, so new house construction has slowed down.
While short term treasuries at 4-5% are attractive, this is more of a place where you stay while you are deciding what to do next. Investing in businesses with a lower revenue outlook isn’t attractive these days especially since a forecasted recession will likely result in lower revenue and earnings for companies. Hence lower Price to Earnings (P/E) multiples as a result.
Some of this money that has been leaving the previous investment havens are starting to migrate and breathe life back into precious metals like gold and silver. For the first time in a long time in April 2023, gold had breached and is holding more or less at the $2,000/ounce price point. It may go even further, but that is still speculation at this point. Most gold bugs are fans of the Austrian School of Economics, Milton Friedman, and who are afraid that currency, which is a debt instrument guaranteed by government, will hyperinflate because the deficit has ballooned, and the current GDP and taxes collected is not enough to shrink it. On the other side of that debate are the Modern Monetary Theory (MMT) fans who feel that there is no problem for government to print more currency and run large deficits if it creates jobs.
Granted there are those with the technical skills who know Wyckoff chart patterns and can make money even in a bear market with the daily price swings of stocks and crypto. But there are only a few people who can do that. Most people can only rely on general trends, not day to day swings. Besides, technical traders don’t always get it right.
Right now the stock market is still doing relatively well and has some good days. Unfortunately if we are indeed heading for a hard landing after all these hikes, we should be seeing by the middle of 2023 some bankruptcies, downsizing, layoffs, foreclosures, and the like. There is a lag to the negative effect that high interest rates cause. There is also a delay in the response even if the Fed pauses or pivots. The negative impacts have to happen first. Then some time has to pass before confidence returns to the markets. In short we are probably headed for a rocky ride for the next few months.
The problem is if the markets just go sideways, all the pre-pandemic investment rules of thumb fly out the window. If investors are not wise enough to see that beyond their biases, their limited experience, and paradigms, they may get hurt and wonder what happened to their money.
The worst thing you can do is hold on to a belief like “60-40,” “buy the dip,” or be anti-crypto just for its own sake. It might be a paradigm that has served you well in the past, but will you refuse to change if an iceberg is headed your way?