If this is not a bull market, what can investors do?
This U.S. analyst does not think we’re in a long-term bull market, or that the economy is on safe ground, so caution is still the byword.
It has to be one or the other. A bull or a bear.
Either we are in a long-term bull market punctuated with temporary smash-ups. Or we’re in a bear market that has been softened by a long but temporary market rally.
The words professional market watchers use to describe these movements are secular (the very long term) and cyclical (temporary).
But whatever words you use, this is a trying time for those who must decide where they will get the strongest and safest returns — especially those who are near retirement, or already there.
For some perspective, we turn to a U.S. advisory that always errs on the side of caution when it considers these questions, Bob Carlson’s Retirement Watch.
Mr. Carlson is not convinced that we are in a secular bull market. He opts for investments with high yields and some potential for capital growth. He does not believe the American economy is out of the woods.
The Canadian economy was never as deeply affected by the credit crisis as the U.S. economy was and is recovering more rapidly. But as the recent market sell-off indicated, nobody is really out of the woods yet.
Primed for yield
Mr. Carlson’s Retirement Paycheck Portfolio is set up to generate a steady stream of income for those who no longer draw a paycheck.
The American funds in the portfolio won’t be on the shopping list of Canadian investors. But the nature of the funds and the role they play in the portfolio reveal a carefully considered retirement strategy.
Following the ripples from the Greek debt crisis and the early May sell-off in the stock market, Mr. Carlson disposed of the one stock in the portfolio, Verizon Communications (NYSE-VZ). Its high yield (close to 7 per cent) did not justify its sluggish returns.
He also cut the allocation to a fund that targets utility, communications, transportation and energy companies, Cohen & Steers Infrastructure (NYSE-UTF). But he is keeping Tortoise Energy (NYSE-TYY), which invests in master limited partnerships in pipelines. It has done well.
The money from Verizon and Cohen & Steers has been shifted to Doubleline Total Return Bond (DBLTX). This fund invests in three different classes of mortgage securities. This is an area that requires great skill, and the manager has an excellent track record, says Mr. Carlson.
The strongest performer in this portfolio is TCW Strategic Income (NYSE-TSI). This fund also owns mortgage securities, most purchased at deep discounts in 2008 and 2009. It should yield 7 per cent this year.
10 per cent of the portfolio is in gold. Half is with gold miners, through Gabelli Global Gold, Natural Resources and Income Trust (AMEX-GGN), the other half with iShares COMEX Gold Trust (AMEX-IAU).
There are two other funds, one that uses convertible securities and options to produce income and a closed-end fund that owns about 150 different funds.
This portfolio is primed for yield — at least 6 per cent this year. That is, it is set up to generate the highest income at the most efficient price. That yield inevitably comes with some volatility, so it is necessary to monitor the markets carefully and have no illusions about the future.
Bear market rally
According to the secularists — those who believe we’re in a long bull market — the bounces in the markets and the economy since March 2009 are the beginning of long-term rises.
Although the 2007-2009 recession was deeper than prior recessions, they think the recovery will follow the usual path. “The Federal Reserve increases money and liquidity, and the sectors of the economy respond in their usual order,” says Mr. Carlson.
The cyclicalists see a different picture. They look at a U.S. economy that declined far more than in typical recoveries since World War II. The first year of the recovery has not seen the rapid rates of past rebounds.
“Because the economic decline was so steep and growth since the bottom has been average,” says the editor, “it will take longer than usual for the economy to return to its prior peaks.”
He clearly leans to the side of the cylicalists. “There’s a high risk the recovery in the economy is transitory and that the stock market rally is a bear market rally rather than a new bull market.”
Problems and warning signs
In long-term bear markets, there is usually a strong rally before a new market decline, states Mr. Carlson. In the past, an initial decline of 55 per cent in the indexes has been followed by a rally of 25 to 135 per cent lasting from six to 24 months.
Then there’s a decline of 25 per cent lasting a year or more. “The rally this time was stronger than average, but so was the previous decline.”
Long-term bull markets don’t start with the conditions we had in March 2009 — average to high stock valuations, zero interest rates and very low inflation. What’s more, says the editor, monetary policy and liquidity always go up in the early years of a bull market.
In this case, the Fed pulled the plug on the bond and mortgage spree that began the rally and recovery.
“Almost all of the key characteristics of new bull markets and economic booms are absent today,” insists Mr. Carlson.
The most important problem is still debt, he says, and that problem is far from being solved. Increasing government debt will not lessen the problem of private sector debt.
Yes, the stock markets still have momentum, concludes this editor. But it looks to him like the same momentum they displayed in 2000 or 2007, just before they toppled. He ends with a word of warning.
“Investors then were willing to ignore problems and warnings signs and pushed the indexes higher. It was the wrong move then, and I think it is now, too.”
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