Separating bear facts from bull in the investment marketplace

If you were an investor in 2018, you participated in a little bit of history.

This bit of market trivia hasn’t happened since 1972. Ned Davis Research puts markets into eight asset classes ranging from U.S. and international stocks to commodities, including gold. Last year was the first time in 46 years that every one of the asset classes posted a return that was either negative or hadn’t made at least 5%. This means that it was tough to get protection anywhere. Normally, including in 2008, bonds will soften the blow of stock market drops. Emerging market stocks might go up when developed market stocks drop, or most notably gold and other commodities will rise when other markets fall. Not so for 2018, and that’s why it may have felt worse than normal.

Energy stocks as measured by the iShares capped energy index are down 35% from their peak in early July. Even Howe Street’s 2018 preferred IPO sector of cannabis stocks is down 40% from the peak in September. To top it off, December is on track to post its worst performance since 1931.

We’ll look back on this someday and remember this little piece of history. For those of you old enough to remember the last time this happened, you may also recall the other big event of 1972, the break-in at the headquarters of the Democratic National Committee at the Watergate Hotel. With Watergate parallels being made every day about the current administration south of the border, is it just coincidence that 2018 has been like 1972 for the markets?

The fact is that very volatile markets often create a change of leadership. That’s what happened in 2000, and that’s what happened in 1973-74.

What was the asset class that far outperformed coming out of the 1972 and 2000 markets? It was commodities, and commodities started outperforming after a dismal performance for the years prior. That is why bear markets create bull markets and vice versa. Commodities are back to the undervalued levels they were last time everything was this bad. History often doesn’t repeat itself, but it rhymes. Wayne Gretzky’s famous quote “Skate to where the puck is going, not where it has been” could not be more relevant to investing. The problem is many investors waste their time by skating to where the puck just came from.

Mining made Vancouver into the venture capital centre of the universe, and it has been dismal the last few years. In March, I will be presenting to mining executives at the Prospectors and Developers Association of Canada annual conference in Toronto. I’ll be discussing sentiment and where we are in the cycle. It’s exciting because nobody cares about the sector, everything is washed out and that usually means opportunity. When unsophisticated investors began to demand to buy cannabis stocks in mid-2018 or energy stocks in mid-2014 or technology stocks at the end of 1999, you would have been wise to run very fast in the other direction.

The other direction right now is the commodity sector.

So how do people protect themselves in this market?

Well, No. 1: don’t do anything crazy. Know your goals, and make sure your portfolio fits them. Once that’s done, have it diversified with some things that zig and some things that zag. In other words, have bonds, have growth stocks, have value stocks, have structured products, have precious metals and international diversification. Although diversification didn’t work in 2018, just like in 1972, these times are usually short-lived.

So skate to where the puck is going, and remember that a dark, dreary and rainy December often brings sunnier skies down the road.

Bob Thompson is a financial adviser with Raymond James Ltd. The opinions contained in this article are those of the author, not Raymond James Ltd.