The Key to Investing in Stocks in 2020 Is Selectivity
As we stare down the barrel of the New Great Depression, one of the most pressing questions investors are asking is: Is it wise to get out of stocks completely?
The answer is no, according to Jim Rickards. But you do need to tread carefully.
Opt for gold and cash first, and then be ready to pick select stocks along the way.
Read on for more.
Until next time,
How to Weather the New Depression without Abandoning the Stock Market
Stocks have not hit bottom.
We may see the S&P 500 fall to 1,700 before the market turns around. That would be an almost 50% decline from the mid-February peak. Not as bad as the first Great Depression, but still one of the worst stock market drawdowns since the 1930s.
At a minimum, investors should reallocate their portfolios to include about 10% in gold or gold mining stocks and 30% in cash.
A rise in the US dollar price of gold is really a devaluation of the US dollar, which is needed to promote growth in the US.
Cash can be your best-performing asset in real terms while deflation takes hold. Deflation means your cash is more valuable in real terms even as debt becomes more onerous in real terms.
For your remaining stock portfolio, the key is selectivity. Even in down markets, some stocks do well and outperform. During the first Great Depression, shares in Homestake Mining — which operated a huge gold mine in South Dakota — soared, for example.
What about stocks?
There’s nothing easy about choosing stock recommendations in this environment. I recommend allocations to gold and cash, but that’s only part of a well-diversified portfolio. What about stocks?
On the one hand, I expect market indices to go much lower before the Great Depression of 2020 is over. That would make it easy just to recommend shorting stocks or buying put options. On the other hand, there will be ‘bear market rallies’ along the way. We seem to be in one such rally right now.
If you’re short stocks in a rally, you could get crushed. If you’re long stocks during the expected downdrafts, you could also get crushed. Does this mean you should get out of stocks completely? The answer is no, you don’t have to.
You should reduce your overall exposure to stocks and increase your allocations to gold and cash (and other hard assets such as real estate and natural resources), but there’s always a place for some allocation to the stock market.
Governments can always spend more
The key is to pick stocks that will do well in drawdowns and rallies. This is a matter of selecting sectors and individual companies that produce goods and services necessary in all states of the world.
Ideally, these companies would have substantial revenues from the US government.
The reason the US government is the ideal customer right now is that the government never runs out of money (it can always print more) and it never goes bankrupt. (Cities and towns can go bankrupt, but the United States of America cannot.)
This analysis points straight to the national defence sector. National defence is always needed, but it may actually be needed more in times of depression. Adversaries of the US — including Iran, China, North Korea, and Russia — are already making threats and increasing their military activities in hot spots like Ukraine, Syria, Iraq, Taiwan, and the South China Sea.
North Korea is launching missiles again and selling technology to Iran. Some reports indicate that China may be preparing to invade some remote islands that technically belong to Taiwan. You can think of this as invading Taiwan in ‘small bites’.
Whatever it takes
If the US has managed to find US$5 trillion to prop up the economy in the Great Depression of 2020 (it has), then the US can certainly find US$1 trillion or more to do ‘whatever it takes’ to ensure national security.
There are many great names in this sector. In my advisory, Strategic Intelligence Australia, my Australian colleague, Nick Hubble, reveals a simple way to position your portfolio to profit from US defence spending.
In the meantime, I hope you and your family stay safe. Together we’ll get through this pandemic, and emerge stronger and hopefully wiser than before.