3 Important Lessons from Monday’s Market Meltdown

Wednesday, January 29, 2020

The markets panicked on Monday.

News of hundreds of new Coronavirus infections in China, along with others elsewhere in Asia, Europe and North America, caused investors to dump stocks of all kinds. Volatility spiked, while economically-sensitive commodities like copper and oil plunged.

But you know what really stood out to me?

Higher-yielding, lower-volatility, anti-recession, “Safe Money” stocks with solid Weiss Ratings barely budged.

  • The Utilities Select Sector SPDR Fund (XLU, Rated “B”) was essentially unchanged, down 0.2%.
  • And the Consumer Staples Select Sector SPDR Fund (XLP, Rated “B-”) lost just 0.3%.

And some even rose.

  • The SPDR Gold Shares (GLD, Rated “C”) rose more than a buck to its highest level since April 2013.
  • Plain-vanilla U.S. Treasuries — in this case, the iShares 20+ Year Treasury Bond ETF (TLT, Rated “C”) — gained 1.5%

Meanwhile, the SPDR S&P 500 ETF Trust (SPY, Rated “C+”) fell FIVE TIMES as much as “Safe Money” sectors. The Nasdaq Composite Index suffered its biggest one-day slump since August, losing 1.9%.

Plus, the junk-bond tracking iShares iBoxx $ High Yield Corporate Bond ETF (HYG, Rated “B-”) shed another 0.7%. That was its fifth down day in the last six.

Why do I bring this up? Because these developments are highly instructive for INCOME-focused investors!

There are very important lessons you can glean not just from these short-term moves, but from the longer-term trends in place since Q1 2018.

First lesson: “Safe Money” investing strategies are winning ... have been winning … and should continue to win!

Consider this: The utilities ETF XLU was ALREADY up more than 7% year-to-date as of earlier this week. That was roughly SEVEN TIMES the gain of the SPY. The Real Estate Select Sector SPDR Fund (XLRE, Rated “B”) was beating the SPY by almost four-to-one, while the XLP was slightly outperforming.

Now, you could easily say: “Hey, wait a minute. It’s not even February yet. Who cares about year-to-date returns?” And yes, I’m mostly citing those results for “fun.”

But here’s the thing: It’s not just a 2020 phenomenon! The XLU has also crushed the SPY by a factor of more than two-to-one over the past TWO YEARS. The XLRE has trounced the SPY by 13 percentage points.

Bottom line? These aren’t short-term trends. Defensive, lower-volatility, higher-rated sectors are leading this market and have been doing so for a long time.

This is GREAT news for income-focused, “Safe Money”-oriented investors. And I recommend you stick with what’s working.

Second lesson: You should limit your exposure to the huge bubble/embedded risks in the corporate debt market!

I’ve talked before about how corporations have been on a borrowing binge that looks every bit as dangerous and enormous as the binge mortgage borrowers went on in the early-2000s.

Yet until very recently, those risks weren’t reflected in the prices or yields of higher-risk corporate bonds and funds that track them. Put simply, you’re not getting compensated — via high-enough yields — to invest in bonds and loans issued by junky companies.

Stay away! Or if you own funds like HYG already, dump them.

Instead, I recommend you invest in Treasuries or Treasury-focused ETFs and mutual funds. They don’t come with the same credit risks and they’ll hold up better if we’re facing heightened recession risk as I believe.

Third lesson: Don’t ignore the bull market in precious metals and mining stocks!

You know from my previous dispatches that I’m not a traditional “gold bug.” I don’t blindly recommend metals or mining stocks all the time.

But I am completely on board with them now and have been since mid-2018. Put simply, precious metals and companies that mine them are the right assets at the right prices at the right point in the economic and credit cycles. Buy them. Hold them. Overweight them. Whatever you have to do.

Finally, if you haven’t looked into other income-focused strategies to bolster the yield your portfolio is spinning off, I strongly encourage you to do so. Boosting your yield by investing in things overbought, high-risk, high-yield bonds or lower-grade corporate loan funds isn’t the right way to go here.

But you can generate greater income with reasonable amounts of risk using specialized investments that target higher-grade, solid underlying companies.

In fact, I have a new opportunity to help you do just that! You can learn more by checking out this video call recording featuring Martin Weiss and my colleague Jay Livingston. It’s well worth a few minutes of your time!  

Until next time,

Mike Larson

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