Compared to other countries the U.S. dollar has remained strong which will help our country in the year to come but will it be enough?
The 2019 inverted yield curve led to the fear of a possible recession in the near future but has been shrugged off by many because of positive sentiment or just to much money in circulation. The Fed rate was lowered through last year helping to make money cheap while stimulating the economy but rates still remain positive unlike Europe. Quantitative easing (QE) from the Fed has helped fuel the equity market while Trump has offset any major run ups with tweets of tariff issues with China and recently pulled markets up with positive news. The QE is suppose to stop by 2nd Qtr of 2020 which may slow market gains. Some believe that we may still see further rate cuts. Ray Dalio placed a bet that something will likely happen this year resulting in a market pull back while others are optimistic that we’ll see a last minute run in the market and another good year. With low interest rates, housing has looked positive plus California offers a new added incentive for Accessory Dwelling Units per Assembly Bill 68 (AB-68). Gold has also pushed higher with economic concerns while commodity prices struggle. It would seem that most asset prices are pushing higher on all fronts. Meanwhile it appears that crypto currencies may have an inverse relationship to the current market.
There has been a large trend shifting from mutual funds to ETFs over the last decade. These ETFs typically help to fuel a select group of heavily weighted stocks. Much of this trend has been driven by the low cost structure of ETFs vs active management. ETF's have seen great growth over the last few years and endorsement from people such as Warren Buffet. However, if we see a major correction and sell off, this could hurt large cap stocks which are held in many of these ETF's. Meanwhile, low rates hurt current bond yields which often were a staple in a fixed income portfolio. Though some are happy with a 2-3% low risk returns while Europe has negative interest rates. Those looking for more significant returns are having to take on more risk and look to alternatives. New offerings in private equity have become available which were originally only offered to accredited investors and of course there is crypto with numerous initial coin offerings (ICO).
Consumer confidence has been pretty good through the year with low unemployment. Similar to 2006, due to record low rates, the U.S. housing index no longer tracks with average hourly wage indicating another bubble may be forming; historically these two items track with each other as housing is tied to incomes. Increases in minimum wage should help support the bottom of the market.
I've looked at investment properties with existing leases where one could get 65% loan to value (LTV) 5/1 adjustable rate mortgage (ARM) @ 7.25% Annual Percentage Rate (APR) based on the rental income but it still didn't make sense unless you pay all cash, most investment are just over priced with low return on investment (ROI). It can be hard to find a wedge deal where you can make further improvements for additional gain. Currently many rentals don’t meet the investor 1% rule for real estate; with AB-68 we may see more homes converted to multi-family for a better ROI thus increasing the rental potential and availability of affordable housing. How this will affect housing prices is unknown but neighbors likely won’t like it.
California commercial and industrial property owners will need to keep a close eye on Prop 13 reform which will hit the November ballot. If it passes, we may see more companies leave California to tax friendly states. Currently, assessment increases are typically capped at 2% a year and only reassessed when sold. If the ballot passes, properties could be reassessed every three years at the current market value.
Trump needs another good year in order to get re-elected and stay in the White House but liberal media would like to do anything to stop this. Impeachment hearings haven’t looked good but sometimes any publicity can be a good thing. This year may be a bumpy ride as we enter an election year and it will be interesting to see how it finishes out. One bad event or wrong tweet could possibly be the turning point and bring down the house of cards.
Here are some issues to consider that are likely coming soon under the next presidency...
The Silver Tsunami is coming. Though considered the wealthiest generation in America's history, there is a great disparity between the haves and the have nots. Baby Boomers are reaching retirement with median net assets of approximately $264K which isn’t nearly enough with record low returns on income assets such as bonds; the average net worth is greater than this amount but skewed by the wealthy and likely localized to certain areas of the country. The United States may see an issue down the line with unfunded pension liabilities which are coming due. As Baby Boomers tighten their belts and pay down debt we may see a deleveraging which will have a deflationary affect on assets. With more and more unable to fund retirement, it's likely that California will see a continual increase in welfare and homelessness over the next decade. We may see a push towards a universal basic income. I tend to believe that politics swings like a pendulum to extremes and our government is fully aware of the coming issue. It's of my opinion that the current homeless crisis in California will lead to further legislation in order to address the coming issue. I tend to believe that politics swings like a pendulum to extremes; often to far either way.
Millennials will overtake Baby Boomers as the largest demographic in the economy but it will still be hard for them to make up for the coming deflationary trends as they enter their 30s and are finally getting married. They’ll be looking for entry level housing and purchasing baby or toddler clothes in their mid 30s. They may be the largest generation but many are strapped with college debt and high housing cost unless they’ve chosen the alternate path of entering a trade. Both Gen X and Millennials will be responsible for their own retirement as companies do away with pensions and now will be required to work till 70 for any Social Security benefit. Yes, there are a few Millennials that have done well over the last decade due to technology or the crypto bubble but that’s only a select few and currently they have only experienced a bull market in equities and housing. Many will likely be facing their first recession soon. Fortunately, many have a desire for minimalism and were raised in a time of YouTube and Netflix with minimal to no advertising. There has been an abundance of financial information for those willing to learn but many Millennials still prefer holding cash vs investing in the market after seeing their parents in the last recession. Social media will continue to fuel bubbles as ads increase with the popularity of trends; many talking about the potential for great profits such as: option trading, drop shipping, and Bitcoin.
Consumer, corporate, and government debts has been on the increase. Earning per a share increases can give some false perception as many companies have been buying back their own shares with cheap money over the last few years.
A lot of QE is helping to fuel the market but not really helping the economy in the long run. Globally the U.S. dollars is likely to stay strong from demand in order to service debts otherwise defaults will reduce the supply which also strengthens the dollar. It should be remembered that we currently have a fiat currency which is only as good as the confidence placed in it. China and Russia are accumulating large amounts of gold and some speculate that they may challenge U.S. currency some time in the future. Europe on the other hand, with negative rates, is looking for a way to reverse its situation. China has also had its share of issues with a weakening economy, “China Suffers Biggest Dollar Bond Default By State-Owned Company in Two Decades” by company called Tewoo Group which was reported towards the end of last year. Real growth has been slowing globally but hopefully a trade deal with China will bring some stability. China had a great run over the last decade but Africa abundant in commodities and India with a growing educated mid-class may be leaders in GDP growth over the next decade. In my opinion, if something were to happen, we’d likely see a recession start first possibly in Europe or China before hitting closer to home though a global recession is not completely out of the question if trade deals can't be worked out. It’s during these periods of financial crisis that the income gap gets larger as assets get bought up for a discount and those without cash are left behind. Buffett is sitting on some 122 plus Billion in cash along with many other successful business people like media guru Gary Vaynerchuk who admitted in a YouTube video that he's holding cash waiting for a down turn and likely for good reasons. Though keep in mind for Buffett this is only a fraction of his wealth and big money must move slower. It can be wise to review 13F filings of Hedge Funds to see how markets may be moving.
Yes, we will likely see a continual run up in the market for a period and shortly thereafter we’ll see a correction or crash as some are predicting. Is it possible that the market could crash as bad as Bitcoin after hitting $19K? I don’t know but I’d assume that big money might move in at the first sign of opportunity. If any Banks were to fail in the next recession, they’ve also already established a “Bail-in” policy to protect themselves with deposits which was first used in Cyprus.
Historically this has been the longest bull run in the U.S. stock market. Artificial Intelligence (AI), Cloud computing in conjunction with 5G technology, and housing will likely be our greatest drivers for growth this year. Over the next decade, we’ll see the advent of AI, autonomous vehicles, blockchain, and quantum computing. It will be important to maintain our global position as a leader in these areas as they'll likely lead the U.S. to the next industrial revolution. Unfortunately technology often displaces obsolete jobs and will likely result in high unemployment as demand for skills shift. Medical and specialized trade skills in the service sector will likely still be in high demand for quite some time. The U.S. GDP will likely remain low with little growth until we see a transfer in wealth between generations, a deleveraging of debt, and further technological advancement in the areas discussed above. For growth it may be good to investigate emerging markets.
Note that these are my views and opinions based on my findings and not to be used as financial advice. I am NOT a financial adviser. Make sure to do your own due diligence, seek your own financial advice, and come to your own conclusions. Various investment have both legal and tax consequences, a professional should always be consulted before acting.