Cheap money, one of the prime elements in the stock market boom of the last decade or almost any bull market, can’t last. It’s time to put more hard assets in the average portfolio.
That was the warning of 3Edge Asset Management managers in a news conference in Manhattan on Wednesday. They were optimistic on stocks in 2017, but earlier this year began cutting back, they said.
What could go wrong with the wonderful bull market predictions of many stock market observers over the last year or so?
The argument against a continued bull run is that the debt policies of governments and individuals have just about reached their effective limits. The equities markets are no longer as strong because it is unlikely that the cheap money policies that have sustained them for about a decade will continue, 3Edge officials said.
“It is a possibility that the economic cycle may again be moving towards a period when inflation, which has been very low for a long time, may begin to increase. This could mean we may increase our exposure to real assets including commodities and gold assets among others,” said DeFred Folts, chief investment strategist for 3Edge.
Firm officials also argued that advisors in the near term should go easy on equities and even think about bonds. The bond bull market of the last few decades is over, argued Stephen Cucchiaro, president and chief investment officer of the firm. He said possibly the same can be said of stocks.
“We are no longer looking at a positive outlook for equities. We are fairly defensively positioned right now,” he added.
What are the danger signs? What changed his mind on the outlook for stocks?
He said that, looking beyond the traditional P/E ratios, he found some disturbing signs in money markets at the beginning of the year.
“Yield curves, while still not inverted, were narrowed,” he said. “Credit spreads were no longer narrow but began to widen slightly.” Added to that were record amounts of private and public debt after a decade of easy money. These could force many governments into raising interest rates beyond where they might want because bond buyers will demand higher rates.