The current bear market is giving us a particularly difficult set of circumstances to overcome but we are relishing the challenge.
We have recently endured a world stock market crash followed by a strong rally which has recovered roughly 50% of the losses so far. Since the Great Depression in 1929 there have been 25 bear markets. On 60% of those occasions the US stock market, the S&P 500, has suffered a sharp correction, then rallied strongly before plunging again to a new low. The $64 million question is, will this happen again? The portents aren’t looking good.
On virtually any measure the US stock market is overvalued. Not only is it expensive, it is vastly overvalued. This makes the probability of a sharp correction highly likely in my opinion though not certain.
The following graph shows the typical cycle from a bull market, share prices rising, to a bear market, share prices falling, and demonstrates typical investor sentiment and behaviour. We appear to be at the Return to “normal” stage right now. The key question is how much further could the market fall if we are close to the Fear stage?
The answer is nobody knows, though it is a sobering thought that the US stock market fell 85% at one stage between 1929-32 during the Great Depression.
How far could world stock markets fall, if at all, this time? My hunch is about 25%-30%.
I don’t think it is likely to be as bad as the Great Depression stock market crash for several reasons.
- There have been huge worldwide stimulus packages including a $2 trillion US one which will gives a major boost to the US economy to get it back up and running.
- There are increasing signs that the worst of the coronavirus pandemic is behind us with decreasing numbers of worldwide infections and deaths.
- Lockdowns are starting to be relaxed in countries such as Spain, Italy and Germany.
- There are promising signs that a vaccine for coronavirus could be available from as early as September this year.
So what are our plans to minimise the CCM Intelligent Wealth Fund’s potential losses over the next few months and put the fund into pole position to emerge from this bear market in a much stronger position?
Firstly we have increased our cash reserves to £800,000 and we have invested £900,000 into gold ETFs. We intend to use these funds to invest heavily into some very cheap, quality shares if, and when, share prices fall to a new low over the next few months.
We have sold a number of overvalued US shares and reduced our holdings in a few others in order to reduce our exposure to the US dollar which is highly likely to become devalued against Sterling.
We are about to invest some money into a leveraged gold ETF in order to get an enhanced return of threefold from the highly probable increase in the gold price.
Furthermore we are buying short bonds by investing in a so called inverse bond ETF which gives the investor the opposite return by a multiple of several fold. So, for example, with a 3x inverse bond ETF, when the return from bonds falls by, say, 10%, the ETF rises in value in the opposite direction by a multiple of 3 which means the 10% loss translates into a gain of 30% for the inverse bond ETF investor.
In the words of the world’s most successful hedge fund manager, the great Ray Dalio, you have to be mad to invest in bonds right now! We aim to profit from bonds’ inevitable decline. Interest rates have reached zero or near zero in the world’s advanced economies which means that bond prices have only one way to go, and that’s down, when interest rates eventually, and inevitably, start to rise again.
Our fund is jam-packed with high quality and low cost shares at the moment. It will have many more once we have re-invested the money from our cash reserves and ETFs. Many of these companies are Small and Mid Caps rather than Large Caps. History shows that it is the smaller companies’ share prices that get hit the hardest in a bear market but they are also the shares that emerge into a bull market with the strongest returns.
We remain very confident that the CCM Intelligent Wealth Fund is going to go from strength to strength and emerge from the current bear market in a very strong position.
So brace yourself for another sharp correction in share prices and make sure you are fully prepared to maximise your returns and minimise your losses. You know it makes sense.
*The value of investments can fall as well as rise. You may not get back what you invest. This communication is for general information only and is not intended to be individual advice. You are recommended to seek competent professional advice before taking any action.
