- I’ll share with you 100% accurate market predictions for 2018.
- I’ll also share with you exactly how to invest to take advantage of what will happen in 2018.
- Sound too good to be true? Well, it isn’t.
I’m going to go out on a limb here and tell you the truth about stock markets in 2018, and also give you the best investing strategy to take advantage of what will happen.
Let’s start with the truth about what will happen in 2018. The truth is that nobody, and I mean nobody, from Warren Buffett, to Kyle Bass and Paul Tudor Jones, to the thousands of analysts covering financial markets, knows what will happen in 2018. It’s simply impossible to predict stock markets. It may look like it’s possible, but it isn’t.
Just as an example, Kyle Bass is famous for having shorted the U.S. housing market in 2008 when he made a 226% return. However, he has been short the Chinese Yuan for the last year and he has been long Greek banks for the bulk of 2017. The Yuan has strengthened 5% in 2017 while Greek banks are still significantly below their 2017 summer highs.
Similarly, Ray Dalio has bet more than a billion shorting Italian banks. The largest Italian bank is close to its 2017 highs and 40% higher than its March 2017 lows.
Now, you might wonder how it’s possible that these guys who have the best investing brainpower in the world can be so wrong. Well, they know nobody can predict what will happen and that the only important thing when investing is to make well calculated positive asymmetric risk reward investments that will give you a good return no matter what happens in the economy or financial markets.
For example, if Ray Dalio loses all of his money on his Italian banks short position with options, he will lose 100% of that investment, but if he is correct, he will make 5 or even 10 times his money. This allows him to be wrong even 80% of the time but still make fantastic returns.
It just goes to show that investing is all about risk and reward. And that is also how investing should be approached in 2018.
The problem is that the S&P 500 has gone up 20% in 2017 and most see it as the place to be. But the higher the S&P 500 goes, the riskier it gets, but that doesn’t make any difference to post investors who happily follow the herd. Equity exposure is extremely high, especially in the S&P 500, and there practically aren’t any shorts left.
Of course there is a possibility that the S&P 500 will continue to rally in 2018, but there is also possibility for a U.S. recession that would make the S&P 500 crash. A potential S&P 500 increase of 10% is definitely not worth a crash of 50%.
If the FED continues with its interest rate hikes and we see some inflation, there is a possibility to see the S&P 500 fall back to average historical valuations which would imply a 50% decline. In the case of financial turmoil, I wouldn’t exclude a larger drop.
Let’s see what could happen in 2018 and what the perfect strategy would be for all scenarios. There are 4 scenarios for 2018.
Scenario #1: All Continues As Is
In such a scenario, the FED will raise interest rates three times but the strength of the economy, U.S. and global, would mitigate the negative impacts of higher interest rates, Inflation remains subdued due to the abundance of money, and investments will create oversupply in many areas. The best investment? Developed market stocks, emerging market credit, commodities, and corporate credit – even high yield.
Scenario #2: Economic Growth But Higher Inflation
If—given the global economic growth—we somehow see higher inflation levels in 2018, the situation could force central banks to significantly increase interest rates across the globe which would have a very negative effect on many countries, companies, and consumers who aren’t protected from higher inflation levels. The best investment for this scenario? Commodity stocks, stocks backed by assets.
Scenario #3: Economic Slowdown & Slower Inflation
In the case of a recession or global economic slowdown, we could see no interest rate hikes in 2017, deteriorating corporate earnings, and investors running to safety. Your best bet, Treasuries.
Scenario #4: Economic Slowdown & Inflation
Given the monetary easing of the past several years, there is a possibility that we see an economic downturn alongside inflation due to a loss of faith in currencies. In such an environment, gold stocks and asset backed investments would do well, quality assets of course.
How Should You Invest?
In my next few articles, I’ll describe in detail how to prepare a portfolio for everything that could happen in 2018 by looking at the probabilities that any one of the four scenarios described above becomes reality. Additionally, I’ll look for the best risk reward investments so that whatever happens, your losses are limited or hedged while your returns are positively asymmetrical to your risk in relation to the current macroeconomic situation.
Perhaps an all-weather strategy will give you a 10% return in 2018 while the S&P 500 will go up 15%. But the all-weather strategy will probably give you a 10% return in case of a recession while the S&P 500 will probably crash 50%. You chose what risk and reward you want to be exposed to.
Additionally, by adding more alpha to your diversified portfolio and a value investing strategy, you can further increase the rewards and limit the downside of an all-weather portfolio. The key is in knowing how much to allocate to each asset class in relation to current risk and rewards in order to rebalance properly from time to time.