Market Musings 04/02/22: Hunting for Diversifying income outside of stocks

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Hunting for value in the tech wreck

Summary:

  • Global stocks have only dropped 3% from the start of 2022 to date
  • The key value-destroying risk for stock market investors: economic recession
  • Short- and long-term interest rates are on the rise, but only from very depressed levels
  • Inflation-beating income is becoming harder to find, given the surge in inflation rates
  • Perusing a list of investment trusts in the debt/loans, infrastructure, real estate and royalty spaces.

Why worry?

When was the last meaningful correction in global equity markets? March 2020, nearly 2 years ago…

Here we are, with financial news channels proclaiming a fall in stock markets since the beginning of the year, with headlines like “The worst January on record”, and so on.

But I do not think that we should overreact to these headlines - looking at the facts of the matter, global stocks have gained 26% since the start of 2020 (including the pandemic bear market in early 2020), and 29% since November 2020. The 3% drop since the start of the year doesn’t even count as a market correction (generally defined as a 10+% drop), let alone anything worse.

After fantastic performance since November 2020,
global stocks have shed 3% year to date

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Source: tradingview.com

Diversified investors should not be looking at horror at these performance numbers, but perhaps should just accept them as normal volatility for a stock market investment, i.e. par for the course…

As someone who invests in stocks for the long run, what is the real risk that one has to watch for?

Recession is the stock investor’s worst enemy

Long-term value destruction in stock markets is generally triggered by one event: economic recession, when economic activity falls, companies go bankrupt and unemployment surges.

So for someone who fears a bear market in stocks, the question is: “are we facing a recession in the next 12 months?

By the way, there is little use in looking at economic forecasts, as economists generally never forecast recession - it is a surprisingly difficult event to forecast.

But we can look for telltale signs of the rising risk of recession. One of the best indicators historically has been the yield curve in the bond market - i.e. the difference between short-term interest…

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