Earnings have been driving growth in the stock market. A trade war is developing and we are entering the 9th year of an economic expansion. CNBC writes that 20% earnings growth is not sustainable and predicts that stocks could plummet 20% to 30% next year.
“You could be looking at the first 20 percent-plus decline in the S&P since the financial crisis,” the firm’s chief U.S. strategist said Tuesday on CNBC’s “Futures Now.”
His worst-case scenario is a 30 percent plunge next year.
“Our primary list of concerns is on the earnings front,” Clissold said. “Earnings growth north of 20 percent isn’t sustainable, especially when you’re nine years into an economic expansion.”
Clissold, a secular bull, isn’t calling for a major, drawn-out recession. Nevertheless, he said he’s on bear market watch due to warning signs indicating a tired bull market.
So, could your investments lose 30% next year due to a tired bull market, trade war, and wavering investor sentiment? What kinds of investments are at risk? And what are safe investments to hold today?
Safe versus Risky Investments
Any stock that is still going up in price based on investor optimism needs to also have strong intrinsic value or it will end up causing a 30% loss or worse. Last spring we asked what can you invest in and not get hurt by a trade war.
Of late we have written about switching investment focus from growth to value as we have been ruminating about the possibility of a stock market crash, economic recession, and collapse of the real estate market, all caused by a trade war. Materials stocks have been hurt by Trump’s announcement of tariffs on steel and aluminum. The bull market has been historic and is likely to cool off if we are lucky and collapse if we are not. How can you invest and not get hurt by a trade war?
Companies that get their raw materials locally and do business primarily in the USA are largely immune from the effects of a trade war. Biotech is also largely protected because when someone comes up with a cure for diabetes or cancer it will be a money maker no matter what else is happening.
Companies with lots of business in China, Europe, Mexico, and Canada are at risk as are companies that get their raw materials from any of these regions. Boeing stands to lose badly if foreign buyers move in bulk to purchase jets from Airbus. Apple gets nearly two thirds of its revenue from offshore and 30% from China. Likewise, Ford has a large offshore presence that could be hurt in a trade war. A larger issue for a company like Apple is that it manufactures many of its parts offshore making them subject to tariffs.
Could your investments lose 30% of their value next year? If you are not sure about how to deal with the possibility of a market correction, consider how to invest without losing money while the economy, trade issues, and the markets are sorting themselves out. A well balanced investment portfolio commonly includes high grade bonds to protect against exactly this kind of risk.