Bear market bottom and 10 sign to help you recognize it

Bear market bottom

A bear market bottom is often elusive and hard to identify. Every investor dreams of timing the stock market bottom and consistently buying low and selling high. But in reality, catching the bear market bottom is hard, even for experienced traders.

What is a bear market?

A bear market is a stock market correction of more than 20%. A stock or an index enters a bear market when the price drops by 20% or many from peak to trough. A bear market can be nerve-wracking as the stock market rarely goes down in a straight line. There are dramatic price movements in both directions while the general trend points lower.

What is a bear market bottom?

Bear market bottoms mark the end of the bear market and the start of a new bull market. While everyone wants to catch the exact moment, the bear market bottom is visible mainly in the rearview mirror.

Many investors emphasize a specific date when the stock market reaches an inflection point and bounces back to start a new bull market. However, the bear market bottoming is a process and may take several weeks or months before a meaningful rally occurs.

How to time the bear market bottom?

We generally do not advise trying to time the stock market. It’s a fool’s errand. You must be right twice in your investment process – when to cash out and when to get back in. Even if you time your exit correctly, you may be unable to time the bottom. You need to have a disciplined approach to getting back. You would go against the grain, and you would be buying while most people around you are panic selling.

Even though we don’t recommend it to everyone, timing the bear market bottom can help you invest extra cash sitting on the sideline or rebalance your portfolio.

Here are some signs that can help you recognize the bear market bottom either at present or in hindsight.

Peak negativity

There is no doubt that bear markets are bad news for the economy. 401k balances drop, forcing many people to delay their retirement. Some folks have to sell their investments because they lose their jobs or need extra cash. Media pundits go on TV to tell you that stocks are not a good investment and how far the stock market will go.

Companies lower their earnings expectations and announce hiring freezes and layoffs.

Stocks can lose 20% of their market value in a heartbeat. There is negative news everywhere.

The bear market will hit bottom before all the bad news has faded. Remember, the stock market is a leading indicator. It drops before an economic downturn and goes up ahead of an economic recovery.

Emotional capitulation indicates a bear market bottom

Bear markets can mess up your emotions. They are a true test of your risk tolerance and ability to absorb stock market volatility and losses.

The bear market bottom comes with emotional panic and the desire to sell everything. You may have heard of another term – market capitulation. That marks the time when the last bull has finally given up. Investors lose hope. Some people sell at the very bottom and never come back.

Cycle of market emotions and bear market bottom

The extreme negative emotions you may experience during a bear market, such as fear or depression, can leave you vulnerable to overstating the long-term risks of your investments. A few times during a bear market, people have asked me if the stock market is going down to zero.

In a bear market, your fears will magnify by the vivid stories of how bad things will get. You will hear a comparison with the Great Depression, the crash of 1987, the Great Financial Crisis, and the Covid meltdown. The strength of feeling could outweigh the power of the evidence. However, any of those events have been a point of maximum financial opportunity for investors.

Taking down the generals

The stock market will bottom only after causing significant pain to a maximum amount of stocks and market participants. The bear market will continue until it steamrolls all the generals and officers, aka the favored market leaders. Some old leaders may never return to the top, and a new cohort will take their place.

Here is the list of the top 10 stocks in the S&P 500 in 2008, just before the financial crisis –

ExxonMobile, Walmart, Microsoft, Procter  & Gamble, Johnson & Johnson, AT&T, JP Morgan, General Electric, Chevron, Pfizer.

Here is the list of the top 10 stocks in the S&P 500 as of November 1, 2022 – Apple, Microsoft, Amazon, Tesla, Alphabet, Berkshire Hathaway, United Health, Exxon Mobile, Johnson & Johnson, and JP Morgan

Insider Buying

Corporate executives and insiders receive most of their compensation in company stock and stock options. Their paycheck is a smaller portion of their total comp. The purpose of equity compensation is to align the interest of corporate executives with the shareholders. This system is not always perfect, but it serves its purpose.

There are many reasons insiders may want to sell their shares – paying off taxes, diversifying, and legacy planning. Many insiders have been notorious for selling at the top of their company stock price.

Take, for example, the CEO of ROKU, Anthony Wood. He has been consistently selling ROKU shares at various price points.

ROKU insider selling

Remember this signature insider buying when Jamie Dimon, the CEO of JP Morgan, bought 500,000 shares of the bank in the middle of the Global Financial Crisis. He made a 450% return on this purchase alone.

JPM insider buying at the bear market bottom

Regarding the overall stock market, I want to observe a broader insider buying from executives at various levels from companies across different industries and sectors. Corporate executives and board members have a closer view of their companies’ revenue and earnings projections. Meaningful insider buying activity will give us more confidence in the company’s prospects.

Broader insider buying signals a market bottom or a decisive inflection point. However, It’s essential to analyze insider buying in the context of the current macro environment, specific company news, and price action. Insiders are also human.

Increased M&A activities

During a bear market, many stocks are selling at a discount. Larger companies swoop in and swallow smaller competitors at favorable terms.

M&A activities can happen during all economic conditions. However, the combination of stocks down 20% or 30% and higher acquisition activities can indicate that CEOs feel confident about their companies and the strength of the economy.

Stocks go up on bad news.

Eventually, sellers get exhausted. And there is nobody left to sell. All remaining are long-term investors and true believers.

At that point in time, stocks could start going up even after bad news. Why you may ask. The stock market tends to overshoot both on the upside and the downside. All the bad news eventually gets priced in. So every new piece of bad news might be incrementally better news than the previous. There could be a result of various factors, such as margins remaining stable or earnings not being as bad as feared.

Consecutive UVOL days

Here is one technical indicator that frequently precedes the actual market bottom. And often, it gets missed.

UVOL is the percentage of stocks that go up on any given day. Research has shown that after a significant market decline, 2 or 3 consecutive days of UVOL above 90%, followed by at least 80% positive participation, will signal an inflection point. New buyers are stepping in and finding prices attractive.

For example, during the first three months of 2009, the stock market was down nearly 23% and 53% since January 1, 2008.

Consequitive UVOL days at the bear markrt bottom

As you can see, despite the market being down, we had multiple days when 90% or 80% of all stock was up on the same day. Ultimately, the S&P 500 hit bottom on March 6 and never looked back.

Fed policies become more accommodative.

The Federal Reserve is one of the leading players causing recession and bear markets. When the Fed wants to stimulate the economy, it lowers interest and increases its balance sheet to improve liquidity and boost overall economic conditions.

On the other hand, when the Fed wants to slow down the economy, they reduce their balance sheet and hike interest rates.

Why would they want to intervene in the market,  you may ask? The Fed has a dual mandate – full employment and price stability. If unemployment is too high, the Fed will lower rates to help corporations borrow money at a lower cost of capital and eventually hire more people.

When inflation goes above the Fed target rate, as in 2022, the 1970s, and the early 1980s, the Fed hikes the interest rates to slow down the economy and suppress demand.

Steepening yield curve

In a typical economic climate, long-term bonds and loans carry a higher interest than short-term bonds and loans. The premium compensates the lender for taking a bigger risk and waiting longer to receive their money back.

The spread between short-term and long-term rates is an indicator of the health of the economy. An inverted yield curve had preceded nearly all recessions in US history. This phenomenon occurs when short-term interest rates are higher than long-term interest rates.


An inverted yield curve is a warning sign that the economy will slow down and possibly fall into recession. Higher short-term rates indicate that structural factors are negatively affecting the economy.

When the Fed lowers short-term rates and the yield curve becomes positively sloped, it is usually a sign that economic conditions are improving and business is returning to usual. The timing of slope change doesn’t always coincide with the exact date of the market bottom. You must consider the impact in the context of the macro environment.

Stocks above 200-day moving averages

Remember, we said in the beginning that bottoming is a process. A stock could take 6 to 12 months or even longer to find its bottom and move up. One measure of price trajectory is the 200-day moving average indicator. As the name suggests, 200 DMA is the average stock price for the last 200 trading days. Taking the series of rolling 200-day moving averages should show the trajectory of the stock price. Stocks in a bear market will have a declining 200-DMA curve and will most likely trade below the 200-day curve for an extended period.


For stocks to complete the bottoming process, they need to shift the direction of the 200 DMA curve from downward to upward. Many traders and investors will wait for the specific stock or index to surpass the 200-day moving average level before buying back.

Stocks in a strong bull market will trade above their 200 DMA curve, serving as a support level.

Bear market bottom and the Fed

The bear markets are volatile. Trying to time the exact bottom is a nearly impossible task. Our emotions will most likely drive us to sell rather than buy at that moment. Also,  not every bear market is the same. All these signals that we discussed may not appear at the same time. Some may not appear at all, as every economic cycle is unique.

Investors have relied on the Fed for years to save the stock market from disseminating losses. The Fed doesn’t have the mandate to support the market. But in recent years, they have used the stock market to achieve their mission of full unemployment and low inflation. The Fed will only intervene in saving the market when it supports its agenda.

Cash is king and stocks are on sale

Cash is king and stocks are on sale

The stock market certainly feels like a rollercoaster these days. We had a strong finish in 2021, but almost everything went downhill from there, except for oil and inflation

It has been a while since I wrote a mid-year market outlook. But after a disappointing first half of the year, I thought it might be an excellent opportunity to throw a few charts and give you a perspective of where we are.

The S&P 500 is in the bear market territory, down 20% for the year. Growth investors have taken a bigger hit, down -28%, while value investors had more modest losses at -12%. US Aggregate Bond is down: -11%, Bitcoin: lost -57%, while Cash: earned a modest 0.1%.

The US is a dominant force.

If you read my newsletter regularly, you know that I was optimistic about the US economy at the beginning of the year. After all, the US has one of the best managed and globally recognized companies and brands.

Let me give you a perspective of the US footprint on the world economy:

  • An estimated 1 billion people worldwide have an iPhone.
  • 1.4 billion monthly active devices running Windows 10 or Windows 11
  • 3 billion people use Facebook
  • 1.9 billion Coca-Cola drinks are served every day
  • 157 million visitors to all Disney parks every year
  • Netflix has 221 million subscribers
  • Amazon ships approximately 1.6 million packages a day, or 18.5 orders per second
  • Google processes over 8.5 billion searches per day
  • P&G’s nearly 300 brands are sold in more than 160 countries.
  • Visa handles an average of 150 million transactions per day

Everyone has a plan till they get punched in the face

When a reporter asked Mike Tyson whether he was worried about Evander Holyfield and his fight plan, he made his famous quote; “Everyone has a plan until they get punched in the face.”
That’s how 2022 feels to me. If you feel the same way, you are not alone.

My investment philosophy is to invest in high-quality US companies with outstanding leadership, a fortress balance sheet, a wide MOAT, and a consistent ability to generate cash. Companies can constantly maneuver between GAAP and NON-GAAP earnings, but cash is always cash.   I expected that 2022 would be volatile, but only hindsight can predict how low the market will go. The plan was to ride the market volatility until we got more positive news towards the year’s second half.

And here we are. 2022 has been one of the most treacherous years for both investing and trading since the Global Financial Crisis in 2008-2009. The negative news on a daily basis can be overwhelming and confusing even for experienced investors.

Let’s summarize what happened in the first half of 2022: 

•    We experienced the third bear market in the span of 5 years – Oct-Dec 2018, Feb – Mar 2020, and now
•    The S&P 500 posted its worst first half-year performance since 1970
•    We marked the worst bond performance in the history of the markets
•    The Fed appeared awfully late and reactive in their monetary policy decisions.
•    Inflation measured by the Consumer price index went up 8.6% by May 2022. The highest rate since the early 1980s.
•    Russia has attacked Ukraine. The first European country to attack another European country since WWII. The two countries combined are one of the largest global exporters of wheat, fertilizers, oil, and natural gas.
•    The EU, the UK, and the US have imposed stiff economic sanctions on Russia to limit their export revenue, adding more fuel to the inflation fire.

•    China has enforced strict zero covid policies and lockdowns in many metropolitan areas.
•    US mortgage rates have jumped to nearly 6%
•    Oil is over $6 at the pump here in California
•    The price of electricity has nearly doubled in the European Union
•    Corporate earnings are expected to decline, but it remains to be seen how far and how deep
•    The average price of a new home in the US is now over 10x higher than per capita disposable income, the highest ratio in history.
•    Consumer sentiment dropped to the lowest level since the Global Financial Crisis
•    Many major retailers reported a sharp increase in inventory

Cash is king?

2022 has been a great year to keep your cash on the sideline, especially if you are a stock or a bond investor. With a return of 0.1%, cash has been one of the best performing asset classes besides oil and natural gas. But before I get you too excited about hoarding cash, look at the 15%-year performance of stock, bonds, and cash.

Since 2007, cash (savings or money market account) achieved a total return of 9% versus 230% for the S&P 500 and 55% for bonds. Besides that, the cumulative inflation was 41% for the same period. In other words, holding cash would have reduced your purchasing power by a third in 15 years.

I would recommend splitting your cash into three buckets. The first bucket is your emergency fund. Keep at least 6 to 12 months of living expenses in this bucket. That is your rainy-day money

The second bucket is money that you will need in a short period of time – buy or remodel your home, get a new car, cover medical bills, etc. While tempting to invest this portion of your money when the market is going up, you should keep them relatively safe in your savings accounts or bonds.

The third bucket is the extra cash you can invest long-term. This bucket contains money you don’t need to touch for at least 5 to 10 years. That is most likely your 401k, Roth IRA, or an investment account with a long-term investment horizon.

Stocks are on sale

Here is a list of some of the worst performers in 2022 in the S&P 500. I am sure you recognize many blue-chip names like Netflix, Nvidia, AMD, Amazon, Adobe, Booking, Microsoft, and Apple. Thermo Fisher, Regeneron, and more. You also need to note that these are some of the companies with the best performance on a 10-, 15- and 20- year basis.

Focus on your goals

2008 was one of the worst years in recent history. Thousands of people lost their homes and jobs. The stock market crashed by 50%. Several banks disappeared overnight. We worked in fear that each day was our last day on the job. It was the dark period to be on Wall Street. Yet, I ran my first marathon in November 2008. I turned a trashy year into personal success. I don’t remember my 401k balance in 2008, but I remember crossing the finish line, getting a medal, and inhaling a bottle of Gatorade.

Today, my advice for you is to focus on yourself and how to achieve your goals. Ignore the negative news and continue working on your plan.

This, too, shall pass. 

I have two young children – a 4-year-old boy and a 1-year-old girl. You can imagine there is a lot of energy at home. So every time one of my kids pours milk on the floor, breaks a glass, or makes a mess, I try to take a deep breath and ask myself, will that matter in a year or ten years from now. In most cases, the answer is no. It won’t.

If the stock market aggravates you today, ask yourself if that matters to you in a year or ten years. Most likely, today will look like a tiny blip on a long-term chart. This bear market is a true test of your risk tolerance and emotional ability to accept market volatility. It’s easy to take a risk when the stocks have only gone up for 13 years. A generation of investors has not experienced an actual bear market and inflation without having the back of the Fed. There is a new sheriff in town. The show will go on, but the players might be different.

Sparks of hope

While we are not out of the woods yet, there are signs of hope that inflation is peaking.
•    Core PCE Price Index (excluding Food & Energy) has declined for three consecutive months, moving from a high of 5.3% down to 4.7%.
•    The price of WTI oil has dropped under $100 at the time of this article
•    Natural gas prices dropped from $9 to $5.7
•    Other commodities such as corn, wheat, soybeans, cotton, and copper are all down over 20% – 30% from their recent highs
•    Consumer spending remains stable, and the saving rate is on a slight upward trend
•    The unemployment rate remains low, and the number of open positions exceeds the number of people looking for work

The game plan

Bear markets are normal. They are not pleasant, but they are an ordinary part of the economic cycle. Did you know that since 1929 the S&P 500 has posted declines in 46% of the days the markets were open? If you check your investments daily, your portfolio will appear very volatile. You will observe almost as many green days as red days. In contrast, the probability of seeing losses over ten years is only 6%.

Two landmark studies from behavioral economists Shlomo Benartzi and Richard Thaler found that the more often we check our portfolio, the lower our long-term returns are likely to be. They found that investors with long-term goals who resisted the temptation to monitor the market earned significantly higher profits over time than those who checked annually. For the average person, the pain of losing is greater than the pleasure of making gains. This phenomenon worsens when you constantly check day to day movements of your portfolio and lose sight of your long-term goals. Mr. Thaler and Mr. Benartzi call this “myopic loss aversion.”

So we are in the middle of a market storm, and here are the steps that you need to follow.

  • Stay the course and follow your goals.
  • If you are already invested, stay invested. There is no benefit to trying to time the market.
  • Dollar-cost averaging your long-term cash. Holding more cash than you need will reduce your long-term purchasing power.
  • Clean up your portfolio from any stocks and funds that keep you from sleeping well at night
  • Rebalance your portfolio according to your risk tolerance and investment horizon.
  • Focus on the long-term and ignore short-term news.

Famous last words

“Buy when there’s blood in the streets, even if the blood is your own.” Nathan Rothschild. a 19th-century British financier and member of the Rothschild banking family, made a fortune buying in the panic that followed the Battle of Waterloo against Napoleon. The Rothschild family had established its own network of couriers, which informed them about the Napoleon defeat before the news reached the British society. 

Bear markets can be long and gut-wrenching. Any positive news gets crushed in a swarm of negativity. Your portfolio gets whiplashed every day. It’s easy to get distracted from following your goals.

Fortunately, this bear market will eventually end. The stock market is a leading indicator. It frequently reaches the bottom before the economy is fully recovered. However, those bottoms are tough to identify because they coincide with a lot of negative economic news, which can be driven by a range of lagging indicators such as CPI, unemployment, corporate earnings, and GDP readings. Timing the market bottom takes a lot of stamina and courage, as often it’s the opposite of what your gut is telling you.

Today offers a great opportunity to reflect on yourself and your financial goals. Review your priorities and determine your path. Let the stock market do the heavy lifting. So you can focus on the things that are in your control.

Ten Successful tips for surviving a bear market

Survive bear market

Surviving a bear market can be a treacherous task even for experienced investors. If you are a long-term investor, you know that the bear markets are common. Since 1945, there have been 14 bear markets—or about every 5.4 years. Experiencing a bear market is rough but an inevitable aspect of the economic cycle.

What is a bear market?

A bear market is a prolonged market downturn where stocks fall by 20% or more. Often, bear markets are caused by fears of recession, changes in Fed policy, political uncertainty, geopolitics, or poor macroeconomic data. There have been 26 bear markets in the S&P 500 Index since 1928. However, there have also been 27 bull markets—and stocks have risen significantly over the long term. The average length of a bear market is 289 days or about 9.6 months. For comparison, the average length of a bull market is 991 days or 2.7 years.

A bear market doesn’t necessarily indicate an economic recession. There have been 26 bear markets since 1929, but only 15 recessions during that time. Bear markets often go alongside a slowing economy, but a weakening market doesn’t necessarily mean an imminent recession.

How low can stock go down during a bear market?

Historically, stocks lose 36% on average during a bear market. For comparison, stocks achieve a 114% return on average during a bull market.

The largest-ever percentage drop by the S&P 500 index occurred on October 19, 1987 (known as The Black Monday), when the S&P 500 dropped by -20.47%. The next biggest selloff happened on October 15, 2008, when the S&P 500 lost –9.03%. In both cases, the stock market continued to be volatile for several months before reaching a bottom. Every time, the end of the bear market was the start of a new bull market. Both times, the stock market recovered and reached historic highs in a few years.

What can you do in the next bear market?

The first instinct you may have when during a sharp market drop is to sell your investments. In reality, this may not always be the right move. Selling your stocks during a bear market could limit your losses but also lead to missed long-term opportunities. Emotional decisions do not bring a sustainable long-term outcome.

Dealing with declining stock values and market volatility can be challenging. The truth is nobody likes to lose money. The bear markets can be treacherous for seasoned and inexperienced investors alike. To be a successful investor, you must remain focused on the strength of your portfolio, your goals, and the potential for future growth. I want to share ten strategies that can help you survive the next bear market and preserve the long-term growth of your portfolio.

1. Stay calm during a bear market

Although it can be difficult to watch your stock portfolio decline, it’s important to remember that bear markets have always had a temporary role in the investment process. Those who survive the bear market and make it to the other side can reap huge benefits.

It’s normal to be cheerful when the stock prices are going higher. And it’s even more natural to get anxious during severe bear markets when stocks are going down.

Here is an example of the typical investor experience during a market cycle. The average investor sells near the bottom of the bear market and goes all in at the top of the bull cycle.

Market cycle

Significant drops in stock value can trigger panic. However, fear-based selling to limit losses is the wrong move

Overall, markets are positive the majority of the time. Of the last 92 years of market history, bear markets have comprised only about 20.6 of those years. Put another way; stocks have been on the rise 78% of the time.

If you are making sound investment choices, your patience and the ability to tolerate paper losses will earn you more in the long run.

2. Focus on your long-term goals

A market downturn can be tense for all investors. Regardless of how volatile the next bear market correction is, remember that “this too shall pass.”

Market crises come and go, but your goals will most likely remain the same. In fact, your goals have nothing to do with the market. Your investment portfolio is just one of the ways to achieve your goals.

Your personal financial goals can stretch over several years and decades. For investors in their 20s and 30s financial goals can go beyond 40 – 50 years. Even retirees in their 60s must ensure that their money and investments last through several decades.

Remain focused on your long-term goals. Pay off your debt. Stick to a budget. Maintain a high credit score. Live within your means and don’t risk more than you can afford to lose.

3. Don’t try to time the market

Many investors believe that they can consistently time the stock market to buy low and sell high. However, timing the market is a myth.

You need to be right twice

When you try to time the market, you have to make two crucial decisions – when to get in and when to get out. With a small margin of error, you must be consistently right all the time.

Missing the best days

Frequently the market selloffs precede broad market rallies. A V-shape recovery often follows a market correction.

Half of the S&P 500 Index’s best days in the last 20 years occurred during a bear market. Another 28% of the market’s best days took place in the first two months of a bull market—before it was clear a bull market had begun. In other words, the best way to survive a bear market is to stay invested since it’s difficult to time the market’s recovery.


Missing the best days of the market
Missing the best days of the market

4. Diversify your portfolio

Diversification is essential for your portfolio preservation and growth. Diversification requires that you spread your investments among different asset classes such as domestic versus foreign stocks, large-cap versus small-cap equity, treasury and corporate bonds, real estate, commodities, precious metals, etc.).

Uncorrelated asset classes react uniquely during market downturns and changing economic cycles. For example, fixed income securities and gold tend to rise during bear markets when stocks fall and investors seek shelter. On the other hand, equities rise during economic expansion and a bull market,

Achieving divarication will lower the risk of your portfolio in the long run. It is the only free lunch you can get in investing.

5. Rebalance your portfolio regularly

Rebalancing your portfolio is a technique that allows your investment portfolio to stay aligned with your long terms goals while maintaining a desired level of risk. Typically, portfolio managers will sell out an asset class that has overperformed over the years and is now overweight. With the sale proceeds, they will buy an underweighted asset class.

Hypothetically, if you started investing in 2010 with a portfolio consisting of 60% Equities and 40% Fixed Income securities, without rebalancing by the end of 2021, you will hold 85% equities and 15% fixed income. Due to the last decade’s substantial rise in the stock market, many conservative and moderate investors may be holding significant equity positions in their portfolios. Rebalancing before a bear market downturn will help you bring your investments to your original target risk levels. If you reduce the size of your equity holdings, you will lower your exposure to stock market volatility.

6. Dollar-cost averaging

Picking the bottom during a bear market is impossible. If you are not willing to invest all your money at once, you can do it over a period of time. By using the dollar-cost averaging method, you invest your cash in smaller amounts at regular intervals, regardless of the movements in the market. When the stock market is down, you buy more shares. And it’s up you buy fewer shares.

If you regularly contribute to your 401k, you are effectively dollar-cost averaging.

Dollar-cost averaging takes the emotion out of investing. It prevents you from trying to time the market by requiring you to invest the same amount regardless of the market’s conditions.

7. Use tax-loss harvesting during bear markets

Tax-loss harvesting is a tax and investment technique that allows you to sell off stocks and other assets that have declined to offset current or future gains from other sources. You can then replace this asset with a similar but identical investment during a bear market to position yourself for future price recovery. Furthermore, you can use up to $3,000 of capital losses as a tax deduction from your ordinary income. Finally, you can carry forward any remaining losses for future tax years.

To take advantage of this option, you must follow the wash sale rule. You cannot purchase the same security in the next 30 days. To stay invested in the market, you can substitute the stock with another stock that has a similar profile or buy an ETF

The actual economic value of tax-loss harvesting lies in your ability to defer taxes into the future. You can think of tax-loss harvesting as an interest-free loan by the government, which you will pay off only after realizing capital gains. Therefore, the ability to generate long-term compounding returns on TLH strategy can appeal to disciplined long-term investors with low to moderate trading practices.

8. Roth Conversion

A bear market creates an excellent opportunity to do Roth Conversion. Roth conversion is transferring Tax-Deferred Retirement Funds from a Traditional IRA or 401k plan to a tax-exempt Roth IRA. The Roth conversion requires paying upfront taxes with the objective of decreasing your future tax burden.

The lower stock prices during a bear market will allow you to transfer a larger portion of your investments while paying lower taxes. For more about the benefits of Roth IRA read here. And for more information about Roth conversion, you can read our Roth conversion article.

9. Keep your emergency fund

I always recommend that my clients and blog readers keep at least six months of essential living expenses in a checking or a savings account. We call it an emergency fund. It’s rainy-day money, which you need to keep aside for crises and unexpected life events. Sometimes bear markets coincide with recessions and layoffs. If you lose your job, you will have enough reserves to cover your essential expenses and stay on your feet. Using your cash reserves will help you avoid dipping into your retirement savings.

10. Be opportunistic and invest

Bear markets create lifetime opportunities for buying stocks at discounted prices. One of the most famous quotes by Warren Buffet is, “When it’s raining gold, reach for a bucket, not a thimble.” Bear market selloffs rarely reflect the real long-term value of a company as they are triggered by panic, negative news, or geopolitical events. For long-term investors, bear markets present an excellent opportunity to buy their favorite stocks at a discounted price. If you want to get in the market after a selloff, look for established companies with strong secular revenue growth, experienced management, a strong balance sheet, and a proven track record of paying dividends or returning money to shareholders.

Final words

A bear market can take a massive toll on your emotions, investments, and retirement savings. The lack of reliable information and the instant spread of negative news can influence your judgment and force you to make rash decisions. Bear market selloffs can challenge even the most experienced investors. Don’t allow yourself to panic even if it seems like the world is falling apart. Prepare for the next market downturn by following my list of ten recommendations. This checklist will help you “survive” the next bear market while still following your long-term financial goals.

The recent market volatility – the tale of the perfect storm

The recent market volatility – the tale of the perfect storm

The recent market volatility – the tale of the perfect storm

October is traditionally a rough month for stocks. And October 2018 proved it.

S&P 500 went down -6.9% in October after gaining as much as 10.37% in the first nine months of the year. Despite recouping some of its losses in early November, the market continues to be volatile, with large daily swings in both directions. On top of that, Small Cap stocks, which were leading the way till late September, went down almost 10% in the span of a few weeks.

So, what led to this rout?

The market outlook in September was very positive. Consumer sentiment and business optimism were at a record high. Unemployment hit a record low. And the market didn’t really worry about tariffs.

I compiled a list of factors that had a meaningful impact on the recent market volatility. As the headline suggested, I don’t believe there was a single catalyst that drove the market down but a sequence of events creating a perfect storm for the equities to go down.

Index Q1 2018 Q2 2018 Q3 2018 Q3 YTD 2018 Oct – Nov 2018 Nov 2018 YTD
S&P 500 Large-Cap (SPY) -1.00% 3.55% 7.65% 10.37% -4.91% 5.45%
S&P 600 Small-Cap (IJR) 0.57% 8.69% 4.87% 14.64% -9.54% 5.09%
MSCI EAFE (VEA) -0.90% -1.96% 1.23% -1.62% -7.06% -8.68%
Barclays US Aggregate Bond (AGG) -1.47% -0.18% -0.08% -1.73% -0.81% -2.54%
Gold (GLD) 1.73% -5.68% -4.96% -8.81% 1.39% -7.42%
Source: Morningstar

1. Share buybacks

The month of October is earnings season. Companies are not allowed to buy back shares as they announce their earnings. The rationale is that they possess significant insider information that could influence the market in each direction. As it turned out, 2018 was a big year for share buybacks. Earlier in the year, S&P estimated $1 trillion worth of share buybacks to be returned to shareholders. So, in October, the market lost a big buyer – the companies who were buying their own shares. And no one stepped in to take their place.

The explosion of share buyback was prompted by the TCJA law last year which lowered the tax rate of US companies from 35% to 21%. Additionally, the new law imposed a one-time tax on pre-2018 profits of foreign affiliates at rates of 15.5% for cash and 8% for non-cash assets. Within a few months, many US mega-cap corporations brought billions of cash from overseas and became buyers of their stock.

2. High valuations

With the bull market is going on its ninth year, equity valuations remain high even after the October market selloff.

Currently, the S&P 500 is trading at 22.2, above the average level of 15.7. Its dividend yield is 1.9%, well below the historical average of 4.34%.

Furthermore, the current Shiller PE Ratio stands at 30.73, one of the highest levels in history. While the traditional Price to Earnings ratio is calculated based on current or estimated earning levels, the Schiller ratio calculates average inflation-adjusted earnings from the previous ten years. The ratio is also known as the Cyclically Adjusted PE Ratio (CAPE Ratio) or PE10.

While a coordinated global growth and low-interest rate environment had previously supported the thesis that high valuation ratios were justified, this may not be the case for much longer.

3. The divergence between US and international stocks

The performance of International Developed and Emerging Market remains disappointing. While the US markets are still in positive territory, International Developed and EM stocks have plunged by -8% and -15% respectively so far in 2018.  Higher tariffs imposed by the US, negative Brexit news, growing domestic debt in China, and slower GDP growth in both the Eurozone and China have spurred fears of an upcoming recession. Despite attractive valuations, international markets remain in correction territory, The dividend yield of MSCI EAFE is 3.34%, while MSCI EM is paying 2.5%, both higher than 1.9% for S&P 500.

4. The gap between growth and value stocks

The performance gap between growth and value stocks is still huge. Growths stocks like Apple, Amazon, Google, Visa, MasterCard, UnitedHealth, Boeing, Nvidia, Adobe, Salesforce, and Netflix have delivered 10% return so far this year. At the same time value strategies dominated by Financials, Consumer Staples and Energy companies are barely breaking even.

Index Q1 2018 Q2 2018 Q3 2018 Q3 YTD 2018 Oct – Nov 2018 Nov 2018 YTD  P/E Ratio
S&P 500 Large Cap Growth (IVW) 1.81% 5.17% 9.25% 16.97% -6.95% 10.01% 29.90
S&P 500 Large Cap Value (IVE) -3.53% 1.38% 5.80% 3.26% -2.59% 0.67% 19.44


5. Tempering earnings growth

So far in Q3 2018, 90% of the companies have announced earnings. 78% of them have reported better than expected actual earnings with an average earnings growth rate of 25.2%. 61% of the companies have reported a positive sales surprise. However, 58 companies in the S&P 500 (12%) have issued negative earnings guidance for Q4 2018. And the list of stocks that tumbled due to cautious outlook keeps growing – JP Morgan, Facebook, Home Depot, Sysco, DR Horton, United Rentals, Texas Instruments, Carvana, Zillow, Shake Shack, Skyworks Solutions, Michael Kors, Oracle, GE, Cerner, Activision, etc.

Despite the high consumer optimism and growing earnings, most companies’ CFOs are taking a defensive approach. Business investment grew at a 0.8% annual rate in the third quarter, down from 8.7% in the second quarter. This was the slowest pace since the fourth quarter of 2016.

The investment bank Nomura also came out with the forecast expecting global growth to slow down. Their economists predicted that global growth in 2019 would hit 3.7% and temper to 3.5% in 2020 from 3.9% in 2018. According to Nomura, the drivers for the slowdown include waning fiscal stimulus in the U.S., tighter monetary policy from the Federal Reserve, increased supply constraints and elevated risk of a partial government shutdown.


6. Inflation is creeping up

Almost a decade since the Credit Crisis in 2008-2009, inflation has been hovering below 2%. However, in 2018, the inflation has finally made a comeback. In September 2018, monthly inflation was 2.3% down from 2.9% in July and 2.7% in August.

One winner of the higher prices is the consumer staples like Procter & Gamble, Unilever, and Kimberly-Clark. Most of these companies took advantage of higher consumer confidence and rising wages to pass the cost of higher commodity prices to their customers.

7. Higher interests are starting to bite

After years of near-zero levels, interest rates are starting to go higher. 10-year treasury rate reached 3.2%, while the 2-year rate is slowly approaching the 3% level. While savers are finally beginning to receive a decent interest on their cash, CDs and saving accounts, higher interest rates will hurt other areas of the economy.


With household debt approaching $13.4 trillion, borrowers will pay higher interest for home, auto and student loans and credit card debt. At the same time, US government debt is approaching $1.4 trillion. Soon, the US government will pay more for interest than it is spending on the military.  The total annual interest payment will hit $390 billion next year, nearly 50 percent more than in 2017, according to the Congressional Budget Office.

The higher interest rates are hurting the Financial sectors. Most big banks have enjoyed a long period of paying almost nothing on their client deposits and savings accounts. The rising interest rates though have increased the competition from smaller banks and online competitors offering attractive rates to their customers.

We are also monitoring the spread between 2 and 10-year treasury note, which is coming very close together. The scenario when two-year interest rates go above ten-year rates causes an inverted yield curve, which has often signaled an upcoming recession.

8. The housing market is slowing down

Both existing and new home sales have come down this year.  Rising interest rates, higher cost of materials, labor shortage and high real estate prices in major urban areas have led to a housing market slow down.  Existing home sales dropped 3.4% in September coming down for six months in a row this year. New building permits are down 5.5% over 2017.

Markets have taken a negative view on the housing market. As a result, most homebuilders are trading at a 52-week low.

9. Fear of trade war

Some 33% of the public companies have mentioned tariffs in their earnings announcements in Q3.  9% of them have negatively mentioned tariffs. According to the chart below, Industrials, Information Technology, Consumer Dictionary, and Materials are the leading sectors showing some level of concern about tariffs.

10. Strong dollar

Fed’s hiking of interest rates in the US has not been matched by its counterparts in the Eurozone, the UK, and Japan. The German 10-year bund now yields 0.4%, while Japanese 10-year government bond pays 0.11%. Combining the higher rates with negative Brexit talks, Italian budget crisis and trade war fears have led to a strong US dollar reaching a 17-month high versus other major currencies.

Given that 40% of S&P 500 companies’ revenue comes from foreign countries, the strong dollar is making Americans goods and services more expensive and less competitive abroad. Furthermore, US companies generating earnings in foreign currency will report lower US-dollar denominated numbers.

11. Consumer debt is at a record high

The US consumer debt is reaching 4 trillion dollars. Consumer debt includes non-mortgage debts such as credit cards, personal loans, auto loans, and student loans. Student loans are equal to $1.5 trillion while auto debt is $1.1 trillion and credit card debt is close to $1.05 trillion. Furthermore, the US housing dent also hit a record high. In June, the combined mortgage and home equity debt were equal to $9.43 trillion, according to the NY Fed.

The rising debt has been supported by low delinquencies, high property values, rising wages, and low unemployment. However, a slowdown in the economy and the increasing inflation and interest rates can hurt US consumer spending.

12. High Yield and BBB-rated debt is growing

The size of the US corporate debt market has reached $7.5 trillion. The size of the BBB rated debt now exceeds 50% of the entire investment grade market. The BBB-rated debt is just one notch above junk status. Bloomberg explains that, in 2000, when BBB bonds were a mere third of the market, net leverage (total debt minus cash and short-term investments divided by earnings before interest, taxes, depreciation, and amortization) was 1.7 times. By the end of last year, the ratio had ballooned to 2.9 times.

Further on, the bond powerhouse PIMCO commented: “This suggests a greater tolerance from the credit rating agencies for higher leverage, which in turn warrants extra caution when investing in lower-rated IG names, especially in sectors where earnings are more closely tied to the business cycle.”

13. Oil remains volatile

After reaching $74.15 per barrel in October, US crude oil tumbled to $55, a 24% drop. While lower crude prices are pushing down on inflation, they are hurting energy companies, which are already trading in value territory.

According to WSJ, the oil’s rapid decline is fueling fears for global oversupply and slowing economic growth. Furthermore, the outlook for supply and demand shifted last month as top oil producers, began ramping up output to offset the expected drop in Iranian exports. However, earlier this month Washington decided to soften its sanctions on Iran and grant waivers to some buyers of Iranian crude—driving oil prices down. Another factor pushing down on oil was the strong dollar.

14. Global political uncertainty

The Brexit negotiations, Italian budget crisis, Trump’s threats to pull out of WTO, the EU immigrant crisis, higher tariffs, new elections in Brazil, Malaysian corruption scandal and alleged Saudi Arabia killing of a journalist have kept the global markets on their toes. Foreign markets have underperformed the US since the beginning of the year with no sign of hope coming soon.

15. The US Election results

A lot has been said about the US elections results, so I will not dig in further. In the next two year, we will have a divided Congress. The Democrats will control the house, while the Republicans will control the Senate and the executive branch. The initial market reaction was positive. Most investors are predicting a gridlock with no major legislature until 2020. Furthermore, we could have intense budget negotiations and even another government shutdown. Few potential areas where parties could try to work together are infrastructure and healthcare. However, any bi-partisan efforts might be clouded by the upcoming presidential elections and Mueller investigation results.

In Conclusion

There is never a right time to get in the market, start investing and saving for retirement. While market volatility will continue to prevail the news, there is also an opportunity for diligent investors to capitalize on their long-term view and patience. For these investors, it is essential to diversify and rebalance your portfolio.

In the near term, consumer confidence in the economy remains strong. Rising wages and low unemployment will drive consumer spending. My prediction is that we will see a record high shopping season. Many of these fifteen headwinds will remain. Some will soften while others will stay in the headlines.

If you have any questions about your existing investment portfolio or how to start investing for retirement and other financial goals, reach out to me at or +925-448-9880.

You can also visit our Insights page where you can find helpful articles and resources on how to make better financial and investment decisions.

About the author:

Stoyan Panayotov, CFA is the founder and CEO of Babylon Wealth Management, a fee-only investment advisory firm based in Walnut Creek, CA. Babylon Wealth Management offers personalized wealth management and financial planning services to individuals and families.  To learn more visit our Private Client Services page here. Additionally, we offer Outsourced Chief Investment Officer services to professional advisors (RIAs), family offices, endowments, defined benefit plans, and other institutional clients. To find out more visit our OCIO page here.

Disclaimer: Past performance does not guarantee future performance. Nothing in this article should be construed as a solicitation or offer, or recommendation, to buy or sell any security. The content of this article is a sole opinion of the author and Babylon Wealth Management. The opinion and information provided are only valid at the time of publishing this article. Investing in these asset classes may not be appropriate for your investment portfolio. If you decide to invest in any of the instruments discussed in the posting, you have to consider your risk tolerance, investment objectives, asset allocation, and overall financial situation. Different investors have different financial circumstances, and not all recommendations apply to everybody. Seek advice from your investment advisor before proceeding with any investment decisions. Various sources may provide different figures due to variations in methodology and timing,

Market Outlook October 2018


The US stock market was on an absolute tear this summer. S&P 500 went up by 7.65% and completed its best 3rd quarter since 2013. Despite the February correction, the US stocks managed to recover from the 10% drop. All major indices reached a series of record highs at the end of August and September.

Index Q1 2018 Q2 2018 Q3 2018 YTD 2018
S&P 500 Large-Cap (SPY) -1.00% 3.55% 7.65% 10.37%
S&P 600 Small-Cap (IJR) 0.57% 8.69% 4.87% 14.64%
MSCI EAFE (VEA) -0.90% -1.96% 1.23% -1.62%
Barclays US Aggregate Bond (AGG) -1.47% -0.18% -0.08% -1.73%
Gold (GLD) 1.73% -5.68% -4.96% -8.81%
Source: Morningstar


The US Economy remains strong

Markets have largely shrugged off the trade war fears benefiting from a strong economy and high corporate earnings.

US Unemployment remains low at 3.9% in July and August, levels not seen since the late 1960s and 2000.

Consumer sentiment is at a multi-year high. The University of Michigan Consumer Sentiment Index hit 100.1 in September, passing 100 for the third time since the January of 2004.

Business optimism hit another record high in August.  The National Federation of Independent Business’ small business optimism index reached the highest level in the survey’s 45-year history. According to NFIB, small business owners are planning to hire more workers, raise compensation for current employees, add inventory, and spend more on capital investments.

A hypothetical 60/40 portfolio

A hypothetical 60/40 index portfolio consisting of 30% US Large Cap Stocks, 10% US Small Cap Stocks, 20% International Stocks, 33% US Fixed Income and 7% Gold would have returned 3.06% by the end of September.

Index Allocation Return
S&P 500 30% 3.11%
S&P 600 10% 1.46%
MSCI EAFE 20% -0.32%
Barclays USAgg Bond 33% -0.57%
Gold 7% -0.62%
Hypothetical Performance 3.06%


US Equity

I expect a strong Q4 of 2018 with a record high holiday consumer and business spending. While stock valuations remain elevated, robust revenue and consumer demand will continue to drive economic growth.

After lagging large-cap stocks in 2017, small-cap stocks are having a comeback in 2018. Many domestically focused publicly traded businesses benefited massively from the recent corporate tax cuts, higher taxes on imported goods and healthy domestic demand.

This year’s rally was primarily driven by Technology, Healthcare and Consumer Discretionary stocks, up 20.8%, 16.7%, and 13.7% respectively. However, other sectors like Materials, Real Estate, Consumer Staples, Financials and Utilities are either flat or negative for the year. Keep in mind of the recent reshuffle in the sector classification where Google, Facebook, Netflix and Twitter along with the old telecommunication stocks were added to a new sector called Communication services.

Sector performance

Sector Performance Price per Price to Dividend
YTD Earnings Sales Yield
as of 10/3/2018 (TTM)  (TTM) (%)
Communication Services -1.91% 22.6x 1.3x 4.83%
Consumer Discretionary 13.72% 16.5x 1.0x 1.27%
Consumer Staples -5.50% 15.1x 1.0x 2.86%
Energy 8.67% 14.0x 1.2x 1.74%
Financials 0.29% 15.2x 2.1x 1.91%
Health Care 16.71% 18.2x 1.2x 1.86%
Industrials 4.73% 15.7x 1.1x 1.85%
Information Technology 20.86% 14.8x 2.1x 0.90%
Materials -3.56% 13.2x 1.1x 1.79%
Utilities 0.77% 17.1x 1.3x 3.70%
Source: Bloomberg


I believe that we are in the last few innings of the longest bull market. However, a wide range of sectors and companies that have largely remained on the sidelines. Some of them could potentially benefit from the continued economic growth and low tax rates.

International Equity

The performance gap between US and foreign stocks continues to grow. After a negative Q1 and Q2, foreign stocks recouped some of the losses in Q3. Furthermore, emerging market stocks are down close to -9% for the year.

Bad economic data coming from Turkey, Italy, Argentina, Brazil, Indonesia, South Africa, and China along with trade war fears put downward pressure on foreign equity markets. Additionally, rising right-wing sentiments in Italy, Austria, Sweden, Hungary, and even Germany puts doubts on the stability of the European Union and its pro-immigration policies.

In my view, the risk that the financial crisis in Turkey, Argentina, and Italy will spread to other countries is somewhat limited. However, the short-term headwinds remain, and we will continue to monitor these markets.


Another major headline for European stocks is the progress of the Brexit negotiation. While soft Brexit would benefit both sides, a hard exit could have a higher negative impact on the UK.

I remain cautiously positive on international stocks. According to WSJ, foreign stocks are trading at a 12% discount over US equity on price to earnings basis. This year created value opportunities in several counters. However, the issue with European and Japanese stocks is not so much in valuations but the search for growth catalysts in conservative economies with an aging population.

Fixed Income

Rising Fed rates and higher inflation have driven bond prices lower so far this year. With inflation rate hovering at 2%, strong employment figures, rising commodity cost, and robust GDP growth, the Fed will continue to hike interest rates. I am expecting one more rate hike in December and three additional hikes in 2019.

I will also continue to monitor the spread between 2-year and 10-year treasury. This spread is currently at 0.23%, the lowest level since 2005.  Normally, a negative spread, i..e 2-year treasury rare higher than 10-year is a sign of a troubled economy.

While modest, individual pockets of the fixed-income market are generating positive performance this year. For instance, short duration fixed income products are now yielding in the range of 1.5% to 2%. The higher interest is now a compelling reason for many investors to keep some of their holdings in cash, CDs or short-term instruments.

With 10-year treasury closing above 3% and moving higher, fixed income investors will continue to see soft returns on their portfolio.


Gold is one of the big market losers this year. The strong dollar and robust US economy have led to the precious metal sell-off.  While the rise cryptocurrency might have reduced some of the popularity of Gold, I still believe that a small position in Gold can offer a buffer and reduce the overall long-term portfolio volatility. The investors tend to shift to Gold during times of uncertainty.

Navigating market highs

With S&P 500, NASDAQ and Dow Jones hitting all-time highs, how should investors manage their portfolio?


End of the year is an excellent opportunity for reconciliation and rebalancing to your target asset allocation. S&P 500 has returned 16.65% in the past five years, and the chance that equities are taking a big chunk of your portfolio is very high. Realizing some long-term gains and reinvesting your proceeds into other asset classes will ensure that your portfolio is reset to your desired risk tolerance level as well as adequately diversified.

Think long-term

In late January and early February, we experienced a market sell-offs while S&P 500 dropped more than 10%. Investors in the index who did not panic and sold at the bottom recouped their losses and ended up with 10% return as of September 30, 2018. Taking a long-term view will help you avoid the stress during market downturns and allow you to have a durable long-term strategy


If you have any questions about your existing investment portfolio or how to start investing for retirement and other financial goals, reach out to me at or +925-448-9880.

You can also visit our Insights page where you can find helpful articles and resources on how to make better financial and investment decisions.

About the author:

Stoyan Panayotov, CFA is the founder and CEO of Babylon Wealth Management, a fee-only investment advisory firm based in Walnut Creek, CA. Babylon Wealth Management offers personalized wealth management and financial planning services to individuals and families.  To learn more visit our Private Client Services page here. Additionally, we offer Outsourced Chief Investment Officer services to professional advisors (RIAs), family offices, endowments, defined benefit plans, and other institutional clients. To find out more visit our OCIO page here.

Disclaimer: Past performance does not guarantee future performance. Nothing in this article should be construed as a solicitation or offer, or recommendation, to buy or sell any security. The content of this article is a sole opinion of the author and Babylon Wealth Management. The opinion and information provided are only valid at the time of publishing this article. Investing in these asset classes may not be appropriate for your investment portfolio. If you decide to invest in any of the instruments discussed in the posting, you have to consider your risk tolerance, investment objectives, asset allocation and overall financial situation. Different investors have different financial circumstances, and not all recommendations apply to everybody. Seek advice from your investment advisor before proceeding with any investment decisions. Various sources may provide different figures due to variations in methodology and timing,

Market Outlook April 2018

Market Outlook April 2018

Market Outlook April 2018

After a record high 2017, the volatility has finally returned. Last year the market experienced one of the highest risk-adjusted performances in recent history. In 2017 there were only 10 trading where the S&P 500 moved by more than 1% in either direction, with not a single trading day when it moved by more than 2%. In contrast, in the 61 trading days of Q1 of 2018, we had 26 days when the S&P 500 moved by more than 1% and 8 days where it changed by more than 2%.

Learn more about our Private Wealth Management services


VIX Index Q1 2018

Market Outlook April 2018
VIX index Q1 2018. Source Yahoo Finance

The VIX Index, which measures the volatility of the S&P 500 started the year ar 9.77. It peaked at 37.33 and ended the quarter at 19.97.

Markets do not like uncertainty, and so far, Q1 had plenty of that. In the first 3 months of the year market landscape was dominated by news about rising inflation and higher interest rates, the Toys R Us bankruptcy, trade war talks and tariffs against China, and scandals related to Facebook user data privacy.

Except for Gold, all major market indices finished in the negative territory.

Index Q1 2018
S&P 500 -1.00%
Russell 2000 -0.18%
MSCI EAFE -0.90%
Barclays US Aggregate Bond Index -1.47%
Gold +1.73%


Fixed Income

Traditionally bonds have served as an anchor for equity markets. Over time stocks and US Treasury bond have shown a negative correlation. Usually, bonds would rise when stocks prices are falling as investors are moving to safer investments. However, in 2018 we observed a weakening of this relationship. There were numerous trading days when stocks and bonds were moving in the same direction.

On the other hand, despite rising interest rates, we see the lowest 10-year/2-year treasury spread since the October of 2007. The spread between the two treasury maturities was 0.47 as of March 29, 2018. While not definite, historically negative or flat spreads have preceded an economic recession.


Momentum remained one of the most successful strategies of 2018 and reported +2.97%. Currently, this strategy is dominated by Technology, Financials, Industrials, and Consumer Cyclical stocks. Some of the big names include Microsoft, JP Morgan, Amazon, Intel, Bank of America, Boeing, CISCO, and Mastercard.


Value stocks continued to disappoint and reported -3.73% return in the Q1 of 2018. Some of the biggest names in this strategy like Exxon Mobile, Wells Fargo, AT&T, Chevron, Verizon, Citigroup, Johnson & Johnson, DowDuPont and Wall-Mart fell close to or more than -10%. As many of these companies are high dividend payers, rising interest rates have decreased the interest of income-seeking investors in this segment of the market.

Small Cap

As small-cap stocks stayed on the sideline of the last year’s market rally, they were mostly unaffected by the recent market volatility.  Given that most small-cap stocks derive their revenue domestically, we expect them to benefit significantly from the lower tax rates and intensified trade war concerns.


Gold remained a solid investment choice in the Q1 of 2018. It was one of the few asset classes that reported modest gains. If the market continues to b volatile, we anticipate more upside potential for Gold.



  • We anticipate that the market volatility will continue in the second quarter until many of the above issues get some level of clarification or resolution.
  • We expect that small and large-cap stocks with a strong domestic focus to benefit from the trade tariffs tension with China and other international partners
  • The actual impact of lower taxes on corporate earnings will be revealed in the second half of 2018 as Q3 and Q4 earnings will provide a clear picture of earnings net of accounting and tax adjustments.
  • Strong corporate earnings and revenue growth have the ability to decrease the current market volatility. However, weaker than expected earnings can have a dramatically opposite effect and drive down the already unstable markets.
  • If the Fed continues to hike their short-term lending rates and inflation rises permanently above 2%, we could see a further decline in bond prices.
  • Our strategy is to remain diversified across asset classes and focus on long-term risk-adjusted performance


If you have any questions about your existing investment portfolio or how to start investing for retirement and other financial goals, reach out to me at or +925-448-9880.

About the author:

Stoyan Panayotov, CFA is the founder and CEO of Babylon Wealth Management, a fee-only investment advisory firm based in Walnut Creek, CA. Babylon Wealth Management offers personalized wealth management and financial planning services to individuals and families.  To learn more visit our Private Client Services page here. Additionally, we offer Outsourced Chief Investment Officer services to professional advisors (RIAs), family offices, endowments, defined benefit plans, and other institutional clients. To find out more visit our OCIO page here.


Biggest Risks for the Markets in 2018

Biggest Risks for the Markets in 2018

Biggest Risks for the Markets in 2018

Wall Street is gearing for another record year on the equity market. On January 2nd Nasdaq crossed 7,000. A day later S&P 500 reached 2,700. Dow Jones followed by passing over 25,000. Who can ask for a better start?

However, with S&P 500 earning +22% and Nasdaq gaining 32% in 2017, many are wondering if the equity market has any fuel left for another big run. With momentum on its side, the recent corporate tax cuts, and president’s promises for deregulation we have the foundation for another record high year. But not everything is perfect. In times of market euphoria, investors tend to ignore warning signals.

Surely, there is no shortage of potential threats that can trigger another significant market correction or an economic recession. In my view, here are the biggest risks for the market in 2018 and beyond.

Learn more about our Private Wealth Management services

Government shutdown

With the start of the year, both Republicans and Democrats are gearing for a battle as the current government funding bill expires on January 19.

Republicans are invigorated after winning their most important battle of 2017. The GOP voted for the most extensive tax overhaul in 30 years which promises to cut taxes for corporations and middle class but also introduces additional $1.5 trillion to the budget deficit in 10 years without counting for growth. Their 2018 agenda includes cutting entitlements, building a border wall, financing a new infrastructure plan, increasing the military budget and maybe repealing Obamacare.

On the opposite end, after their win in the Alabama senate race, Democrats are slowly recovering from their knockdown phase after the US 2016 Presidential election.  Democrats will try to push their agenda on the Dreamers Act and save the government healthcare subsidies.

With a slim Senate majority and traitorous rifts inside the party, the GOP will have a hard time passing any significant legislation. The Senate leadership already expressed their desire to work with Democrats on the next bill on avoiding a government shutdown. While the public may appreciate a bi-partisan agreement, both parties have shown an enormous resistance to compromise on any level.

Geopolitical crisis

There is a growing number of geopolitical threats that can compromise the global growth. The world is becoming a treacherous place where one miscalculation can lead to a human disaster. From cyber-war with Russia to nuclear tension with North Korea, ongoing unrest in the Middle East, shutting down NAFTA, populist governments taking over Europe, and hard Brexit negotiations.

China is looking to fill the vacuum left by the US after scrapping the Trans-Pacific Trade Agreement.  Russia and President Putin want to play a bigger role in the world affairs. The remnants of ISIS are spread around the world and planning the next terrorist attack. The 16-year war in Afghanistan is still going with no resolution in sight. The tension between Iran and Saudi Arabia is on its highest level for years. The president must maneuver carefully in the dangerous waters of world politics where governments are becoming more and more protectionist and populist.

Health Care Chaos

The GOP was unsuccessful in repealing the Affordable Care Act. However, they were able to remove the individual mandate as part of the recent tax cut bill.

With the penalty going away in 2019, there will be no incentive for healthier individuals to sign up for health insurance.  Furthermore, this will lead to a lower number of insured participants and drive higher their cost of health care.

US has already the most expensive health care among all OECD counties. The average cost per individual in the USA is $10,000 versus $6,700 for Switzerland and $5,100k for Germany. The Congress and Senate must find a solution to address the climbing health care cost. The alternative will lead to more healthy people dropping from the system, skyrocketing medical bills, social unrest,  and even economic slowdown.

Retail meltdown

US retail is in danger. In 2017, 19 retailers including Toys R US, Aerosoles, Perfumania, True Religions and Gymboree filed for bankruptcy protection. Many others like Teavana, Bebe, and Kenneth Cole closed all their physical locations to focus on online expansion. Despite rising consumer confidence and record-high holiday shopping spree, traditional brick-and-mortar retailers are struggling to stay afloat.

Apart from a few big names, US retailers are loaded with debt. According to Bloomberg, $100 million of high-yield retail debt was set to mature in 2017. Furthermore, this figure will rise to $1.9 billion in 2018 and will average $5 billion between 2019 to 2025. With rising interest rates and permanent drift towards online shopping, many retailers will continue to close down unprofitable locations. Local economies relying heavily on retail jobs will suffer high unemployment rates in the coming years.

Consumer debt crunch

The US household debt has reached $13 trillion in the third quarter of 2017, according to the New York Fed. Driven by low-interest rates, the mortgage debt increased to $8.7 trillion. Student debt has reached $1.36 trillion. Auto loan debt is $1.2 trillion. While mortgage delinquencies are stable at 1.2%, bad auto loans have risen to 2.4%, and student debt delinquencies have reached 9.6%.  The rising interest rates can lead to more people failing on their loans, which can potentially trigger another crisis similar to 2008.

Interest hikes and hyperinflation

The US fed is planning for three rate hikes in 2018. Oil has slowly passed $60 a barrel. And US dollar reached 1.20 against the euro. Moreover, U.S. manufacturing expanded in 2017, as gains in orders and production capped the strongest year for factories since 2004.  While around the world factories have warned they are finding it increasingly hard to keep up with demand, potentially forcing them to raise prices.

While CPI hovers around 1.7%, global markets have not priced in the prospects for higher inflation. Therefore, unexpected spike in prices can lead to more Fed rate hikes.

Additionally, the lost corporate tax revenue can jeopardize the ability of the US Treasury to issue debt at lower rates, which can drive the budget deficit even further. Historically, uncontrolled inflation combined with growing budget deficit has led to periods of hyperinflation, higher credit cost and loss of purchasing power.

Retirement savings going down

Only half of US families have a retirement account. The 401k plan patriation is only 43%. Of those with retirement savings, the average balance is just $60,000. Social Security ran $39 billion deficit in 2014 and will be entirely depleted by 2035.

With rising interest rates and GOP plans to cut entitlements, many Americans will face enormous retirement risk and suffer substantial income loss during their non-working years. Without an urgent reform, the US social security system is a time-ticking bomb that can hurt both businesses and families.

Mueller investigation

The former FBI chief investigation is at full speed as more revelations about the Trump campaign appear almost on a daily basis. You might need a crystal ball to predict what will be the exact outcome. However, it is virtually certain that there were people in the Trump circle who were pursuing their own personal interests. The initial theory of collusion and obstruction of justice is leading to allegations about money laundering. If the Mueller investigation proves those accusations, we could experience a political crisis not seen since Watergate.


About the author: Stoyan Panayotov, CFA is the founder and CEO of Babylon Wealth Management, a fee-only investment advisory firm. Babylon Wealth Management offers highly customized Outsourced Chief Investment Officer services to professional advisors (RIAs), family offices, endowments, defined benefit plans and other institutional clients. To learn more visit our OCIO page here.

Market Outlook December 2017

Market Outlook December 2017

Market Outlook December 2017

As we approach 2018, it‘s time to reconcile the past 365 days of 2017. We are sending off a very exciting and tempestuous year. The stock market is at an all-time high. Volatility is at a record low. Consumer spending and confidence have passed pre-recession levels.

I would like to wish all my readers and friends a happy and prosperous 2018. I guarantee you that the coming year will be as electrifying and eventful as the previous one.


The new tax plan

The new tax plan is finally here. After heated debates and speculations, president Trump and the GOP achieved their biggest win of 2017. In late December, they introduced the largest tax overhaul in 30 years. The new plan will reduce the corporate tax rate to 21% and add significant deductions to pass-through entities. It is also estimated to add $1.5 trillion to the budget deficit in 10 years before accounting for economic growth.

The impact on the individual taxes, however, remains to be seen. The new law reduces the State and Local Tax (SALT) deductions to $10,000. Also, it limits the deductible mortgage interest for loans up to $750,000 (from $1m). The plan introduces new tax brackets and softens the marriage penalty for couples making less than $500k a year. The exact scale of changes will depend on a blend of factors including marital status, the number of dependents, state of residency, homeownership, employment versus self-employment status. While most people are expected to receive a tax-break, certain families and individuals from high tax states such as New York, New Jersey, Massachusetts, and California may see their taxes higher.


Affordable Care Act

The future of Obamacare remains uncertain. The new GOP tax bill removes the individual mandate, which is at the core of the Affordable Care Act. We hope to see a bi-partisan agreement that will address the flaws of ACA and the ever-rising cost of healthcare. However, political battles between republicans and democrats and various fractions can lead to another year of chaos in the healthcare system.


Equity Markets

The euphoria around the new corporate tax cuts will continue to drive the markets in 2018. Many US-based firms with domestic revenue will see a boost in their earnings per share due to lower taxes.

We expect the impact of the new tax law to unfold fully in the next two years. However, in the long run, the primary driver for returns will continue to be a robust business model, revenue growth, and a strong balance sheet.


Momentum was the king of the markets in 2017. The strategy brought +38% gain in one of its best years ever. While we still believe in the merits of momentum investing, we are expecting more modest returns in 2018.


Value stocks were the big laggard in 2017 with a return of 15%. While their gain is still above average historical rates, it’s substantially lower than other equity strategies.  Value investing tends to come back with a big bang. In the light of the new tax bill, we believe that many value stocks will benefit from the lower corporate rate of 21%. And as S&P 500 P/E continues to hover above historical levels, we could see investors’ attention shifting to stocks with more attractive valuations.

Small Cap

With a return of 14%, small-cap stocks trailed the large and mega-cap stocks by a substantial margin. We think that their performance was negatively impacted by the instability in Washington. As most small-cap stocks derive their revenue domestically, many of them will see a boost in earnings from the lower corporate tax rate and the higher consumer income.

International Stocks

It was the first time since 2012 when International stocks (+25%) outperformed US stocks. After years of sluggish growth, bank crisis, Grexit (which did not happen), Brexit (which will probably happen), quantitative easing, and negative interest rates, the EU region and Japan are finally reporting healthy GDP growth.

It is also the first time in more than a decade that we experienced a coordinated global growth and synchronization between central banks. We hope to continue to see this trend and remain bullish on foreign markets.

Emerging Markets

If you had invested in Emerging Markets 10-years ago, you would have essentially earned zero return on your investments. Unfortunately, the last ten years were a lost decade for EM stocks. We believe that the tide is finally turning. This year emerging markets stocks brought a hefty 30% return and passed the zero mark. With their massive population under 30, growing middle class, and almost 5% annual GDP growth, EM will be the main driver of global consumption.


Fixed Income

It was a turbulent year for fixed income markets. The Fed increased its short-term interest rate three times in 2017 and promised to hike it three more times in 2018. The markets, however, did not respond positively to the higher rates. The yield curve continued to flatten in 2017. And inflation remained under the Fed target of 2%.

After a decade of low interest, the consumer and corporate indebtedness has reached record levels. While the Dodd-Frank Act imposed strict regulations on the mortgage market, there are many areas such as student and auto loans that have hit alarming levels. Our concern is that high-interest rates can trigger high default rates in those areas which can subsequently drive down the market.



2017 was the best year for gold since 2010. Gold reported 11% return and reached its lowest volatility in 10 years.  The shiny metal lost its momentum in Q4 as investors and speculators shifted their attention to Bitcoin and other cryptocurrencies. In our view gold continues to be a solid long-term investment with its low correlation to equities and fixed income assets.


Real Estate

It was a tough year for REITs and real estate in general. While demand for residential housing continues to climb at a modest pace, the retail-linked real estate is suffering permanent losses due to the bankruptcies of several major retailers. This trend is driven on one side by the growing digital economy and another side by the rising interest rates and the struggle of highly-leveraged retailers to refinance their debt. Many small and mid-size retail chains were acquired by Private Equity firms in the aftermath of the 2008-2009 credit crisis. Those acquisitions were financed with low-interest rate debt, which will gradually start to mature in 2019 and peak in 2023 as the credit market continues to tighten.

Market Outlook December 2017

In the long-run, we expect that most public retail REITs will expand and reposition themselves into the experiential economy by replacing poor performing retailers with restaurants and other forms of entertainment.

On a positive note, we believe that the new tax bill will boost the performance of many US-based real estate and pass-through entities.  Under the new law, investors in pass-through entities will benefit from a further 20% deduction and a shortened depreciation schedule.


What to expect in 2018

  • After passing the new tax bill, the Congress will turn its attention to other topics of its agenda – improving infrastructure, and amending entitlements. Further, we will continue to see more congressional budget deficit battles.
  • Talk to your CPA and find out how the new bill will impact your taxes.
  • With markets at a record high, we recommend that you take in some of your capital gains and look into diversifying your portfolio between major asset classes.
  • We might see a rotation into value and small-cap. However, the market is always unpredictable and can remain such for extended periods.
  • We will monitor the Treasury Yield curve. In December 2017 the spread between 10-year and 2-year treasury bonds reached a decade low at 50 bps. While not always a flattening yield has often predicted an upcoming recession.
  • Index and passive investing will continue to dominate as investment talent is evermore scarce. Mega large investment managers like iShares and Vanguard will continue to drop their fees.


Happy New Year!


Final words

If you have any questions about your existing investment portfolio, reach out to me at or +925-448-9880.

You can also visit our Insights page where you can find helpful articles and resources on how to make better financial and investment decisions.

About the author:

Stoyan Panayotov, CFA is the founder and CEO of Babylon Wealth Management, a fee-only investment advisory firm based in Walnut Creek, CA. Babylon Wealth Management offers personalized wealth management and financial planning services to individuals and families.  To learn more visit our Private Client Services page here. Additionally, we offer Outsourced Chief Investment Officer services to professional advisors (RIAs), family offices, endowments, defined benefit plans, and other institutional clients. To find out more visit our OCIO page here.


Will Emerging Markets Continue to Rally

Will Emerging Markets Continue to Rally

Will Emerging Markets Continue to Rally

Emerging Markets are up 26% so far year. But can they sustain the rally?

If you invested in one of the large EM ETFs like EEM (iShares MSCI Emerging Markets ETF) or VWO (Vanguard FTSE Emerging Markets Index Fund ETF Shares) ten years ago, you would have earned nearly zero as of September 29, 2017. At the same time, you would have doubled your money if you invested in S&P 500 (SPY) as long as you stayed put during the market crisis of 2008 – 2009.

So is this just a fluke? Or maybe after a lost decade of volatile price swings, EM stocks are finally ready to turn the page. While we recognize the long-term opportunity in EM, we also understand this could be a bumpy ride.

Learn more about our Private Wealth Management services


What is an Emerging Market?

In the investment world, the countries are divided into three main categories – developed, emerging and frontier. Developed countries include countries with developed capital markets and relatively high GDP per capita. The list consists of USA, Canada, Japan, UK, Australia, Germany, Italy, France and several others. Emerging markets have some similarities with the developed economies including functioning capital markets and a banking system, but they lack certain characteristics including lower market liquidity and transparency. They also have more political influence and less strict accounting standards.

The list of Emerging economies includes Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Thailand, Turkey, and UAE.

Just to make things a little more complicated, FTSE  indices classify Korea as a developed economy. However, other index providers such as MSCI and Dow Jones include Korea in the EM group.

What makes the emerging markets an attractive investment?

Economic growth

EM has been characterized by higher growth than most developed economies. According to IMF, emerging markets GDP is expected to grow by an average of 4.7% in 2017. Furthermore, despite the recent slowdown, next year projections are the first time in six years when we see an acceleration in the growth forecast.

For comparison, US GDP is expected to grow at 2.6% in the next two years, while EU is projected at 1.7%.

Also, according to World Bank consumption growth per capita in emerging is expected to grow by an average of 5.5% versus 1.5% for developed markets.

This growth differential provides an opportunity for companies with strong presence in these markets to benefit and increase their revenues as a result of the expected economic growth.

Population trends

According to Euromonitor, developing countries account for 90% of the world population under 30.  For instance, the average age of the Philippines is 24, India is 26, Mexico is 27, and Brazil is 31. For comparison, the median age in the USA is 37.2. Japan and Germany are at 46.1.  Emerging economies have a young population base which will help them support future economic and consumption growth. In fact, developing markets now account for more than 75% of global growth in output and consumption, almost double their share in just two decades.

Attractive Valuations

With US stocks equities almost fully priced, investors are starting to look for better opportunities abroad. At 16x current price-to-earnings, emerging market equities (EEM) are considerably cheaper than US large cap-equities.  For comparison, SPY currently trades at 23.7 times price-to-earnings. Furthermore, Emerging Market price-to-book ratio is 1.63x versus 2.85 for SPY.

Even with the 25% return so far this year, EM stocks are still trading at nearly 50% discount to US large cap stocks. This valuation gap creates opportunities for investors to transfer some of their assets to less expensive assets.


For investors looking to diversify some of their risks, EM represents a compelling alternative. EM stocks traditionally have a lower correlation to the US equity markets.

For instance, a broad EM ETF such as EEM has a correlation of 0.80 to the S&P 500, while its R-squared (explained returns) ratio is 62.7%. As a comparison, a US Small Cap stocks (IJR) have a 0.92 correlation ratio and 78.7% R-squared to the large US cap index.


What are some of the risks?

Volatility of returns

Owning EM stocks comes with a lot of risks. The EM equity performance has been inconsistent for the past ten years. $1,000,000 invested in EEM ETF in Jan 1, 2007 would have produced $ 1,005,620 by Dec 2015 and $1,433,727 by Sep 2017. This is the equivalent of 0.06% and 3.45% annualized rate of return. As a comparison, the same one million invested in SPY would have made 1,735,171 in 2015 and 2,215,383 in Sep 2017 or an average of 6.31% and 7.68% respectively.

This return volatility shows the unpredictability and large swings of returns in EM stocks, which brings us to the next point.

Furthermore, investors who are willing to invest in EM have to stomach the higher volatility associated with these stock. To illustrate, EEM has a beta of 1.29 vs. 1 for S&P 500 and 10-year Standard deviation of 24.59% vs. 15.74% for S&P 500. The maximum drawdown of EEM was -60.44% versus -50% for SPY.

Company concentration

A handful of large corporations and conglomerates are consistently dominating all EM country indices. For example, the top 5 holdings in the China Large-Cap index make up 38% of the entire market. In Korea, top 5 companies make up 33%, with Samsung dominating the market with 20%. In India, top 5 companies’ weight is 36%, in Russia, 35% and Mexico, 40%.  As a comparison, top 5 stocks in the S&P 500 index (SPY) make up 11% of the total.

This high concentration leaves the Emerging markets exposed to the fortunes of the handful of companies dominating their markets.

Political instability

Another risk associated with emerging economies is their heavy dependence on local politics. Just in the past few years, we saw North Korea nuclear threats, political scandals in Brazil, sanctions against Russia, the war in Syria. Changes in political power or any geopolitical turmoil will significantly impact the emerging economies and their neighbors.



About the author: Stoyan Panayotov, CFA is the founder and CEO of Babylon Wealth Management, a fee-only investment advisory firm. Babylon Wealth Management offers highly customized Outsourced Chief Investment Officer services to professional advisors (RIAs), family offices, endowments, defined benefit plans and other institutional clients. To learn more visit our OCIO page here.

Disclaimer: Past performance does not guarantee future performance. Nothing in this article should be construed as a solicitation or offer, or recommendation, to buy or sell any security. The content of this article is a sole opinion of the author and Babylon Wealth Management. The opinion and information provided are only valid at the time of publishing this article. Investing in these asset classes may not be appropriate for your investment portfolio. If you decide to invest in any of the instruments discussed in the posting, you have to consider your risk tolerance, investment objectives, asset allocation and overall financial situation. Different investors have different financial circumstances, and not all recommendations apply to everybody. Seek advice from your investment advisor before proceeding with any investment decisions. Various sources may provide different figures due to variations in methodology and timing, Copyright:


End of Summer Market Review

End of Summer Market Review

Happy Labor Day!

Our hearts are with the people of Texas! I wish them to remain strong and resilient against the catastrophic damages of Hurricane Harvey. As someone who experienced Sandy, I can emphasize with their struggles and hope for a swift recovery.


I know that this newsletter has been long past due. However, as wise people say, it is better late than never.

It has been a wild year so far. Both Main and Wall Street kept us occupied in an electrifying thriller of election meddling scandals, health reforms, political battles, tax cuts, interest rate hikes and debt ceiling fights (that one still to unfold).

Between all that, the stock market is at an all-time high. S&P 500 is up 11.7% year-to-date. Dow Jones is up 12.8%, and NASDAQ is up to the whopping 24%. GDP growth went up by 3% in the second quarter of 2017. Unemployment is at a 10-year low. 4.3%.

Moreover, despite record levels, very few Americans are feeling the joy of the market gains and feel optimistic about the future. US families are steadily sitting on the sideline and continuing to pile cash. As of June 2007, the amount of money in cash and time deposits (M2) was 70.1% of the GDP, an upward trend that has continued since the credit crisis in 2008.

End of Summer Market Review

Source: US Fed,

Given that the same ratio of M2 as % of GDP is 251% in Japan, 193% in China, 91% in Germany, and 89% in the UK, US is still on the low end of the developed world. However, this is a persistent trend that can reshape the US economy for the years to come.


The Winners

This year’s rally was all about mega-cap and tech stocks. Among the biggest winners so far this year we have Apple (AAPL), up 42%, Amazon (AMZN), 27%, NVIDIA (NVDA), 54%, Adobe, 48%, PayPal, 55%. Netflix, 36%, and Visa (V), 33%,

Probably the biggest story out there is Amazon and its quest to disrupt the way Americans buy things. Despite years of fluctuating earnings, Amazon is still getting full support from its shareholders who believe in its long-term strategy. The recent acquisition of Whole Foods and announcement of price drops, only shows that Amazon is here to stay, and all the key retail players from Costco, Wall-Mart, Target, and Walgreens to Kroger’s, Home Depot, Blue Apron and AutoZone will have to adjust to the new reality and learn how to compete with Amazon.

The Laggards

Costco, Walgreens, and Target are bleeding from the Amazon effect as they reported- 0.49%, -0.74% and -21% year-to-date respectively. Their investors are become increasingly unresponsive to earnings surprises and massively punishing to earnings disappointments.

Starbucks, -0.74%, is still reviving itself after the departure of its long-time CEO, Howard Shultz, and will have to discover new revenue channels and jump-start its growth.

The energy giants, Chevron, -5%, Exxon, -12%, and Occidental Petroleum, -14.5% are still suffering from the low oil prices. With OPEC maintaining current production levels and surge in renewable energy, there is no light at the end of the tunnel. If these low levels continue, I will expect to see a wave of mergers and acquisitions in the sector. Those with a higher risk and yield appetite may want to look at some of the companies as they are paying a juicy dividend – Chevron, 4%, Exxon, 4%, and Occidental Petroleum, 5.4%

AT&T, -7% and Verizon, -5%, are coming out of big acquisitions, which down-the-road can potentially create new revenue channels and diversify away from the otherwise slow growing telecom business. In the near-term, they will continue to struggle in their effort to impress their investors. Currently, both companies are paying above average dividends, 5.15%, and 4.76%, respectively.

And finally, Wells Fargo, -4%. The bank is suffering from the account opening scandals last year and the departure of its CEO.  The stock has lagged its peers, which reported on average, 8% gains this year. While the long-term outlook remains positive, the short-term prospect remains uncertain.


Small Caps

Small Cap stocks as an asset class have not participated in this year’s market rally. Despite spectacular 2016 returns, small cap stocks have remained in the shadow of the uncertainty of the expected tax cuts and infrastructure program expansion. While I believe the Congress will come out with some tax reductions in the near term, the exact magnitude is still unclear. My long-term view of US small caps remains bullish with some near-term headwinds.


International Stocks

After several years of lagging behind US equity markets, international stocks are finally starting to catch up. The Eurozone reported 2% growth in GDP. MSCI EAFE is up 17.5% YTD, and MSCI Emerging Markets is up 28% YTD.

Despite the recent growth, International Developed and Emerging Market stocks remain cheap on a relative basis compared to US Stocks.  I maintain a long-term bullish view on international and EM stocks with some caution in the short-term.

Even though European Central Bank has kept the interest rates unchanged, I believe that its quantitative easing program will slow down towards the end of 2017 and beginning of 2018. The German bund rates will gradually rise above the negative levels. The EUR / USD will breach and remain above 1.20, a level not seen since 2014.

Interest Rates

I am expecting maximum one or may be even zero additional rate hikes this year. Under Janet Yellen, the Fed will continue to make extremely cautious and well-measured steps in raising short term rates and slowing down of its Quantitative Easing program. Bear in mind that the Fed has not achieved its 2% inflation target and any sharp rate hikes can ruin the already fragile balance in the fixed income space.

Real Estate

After eight years of undisrupted growth, US Real Estate has finally shown some signs of slow down. While demand for Real Estate in the primary markets like California and New York is still high, I expect to see some cooling off and normalization of year-over-year price growth

US REITs have reported 3.5% total return year-to-date, which is roughly the equivalent of -0.5% in price return and 4% in dividend yield.

Some retail REITs will continue to struggle in the near-term due to store closures and pressure from online retailers. I encourage investors to maintain a diversified REIT portfolio with a focus on strong management, sustainability of dividends and long-term growth prospects.


After several years of underperformance, Gold is making a quiet comeback. Gold was up 8% in 2016 and 14% year-to-date. Increasing market and political uncertainty and fear of inflation are driving many investors to safe havens such as gold. Traditionally, as an asset class, Gold has a minimal correlation to equities and fixed income. As such, I support a 1% to 5% exposure to Gold in a broadly diversified portfolio as a way to reduce long-term risk.


About the author: Stoyan Panayotov, CFA is a fee-only investment advisor based in Walnut Creek, CA. His firm Babylon Wealth Management offers fiduciary investment management and financial planning services to individuals and families.


Disclaimer: Past performance does not guarantee future performance. Nothing in this article should be construed as a solicitation or offer, or recommendation, to buy or sell any security. The content of this article is a sole opinion of the author and Babylon Wealth Management. The opinion and information provided are only valid at the time of publishing this article. Investing in these asset classes may not be appropriate for your investment portfolio. If you decide to invest in any of the instruments discussed in the posting, you have to consider your risk tolerance, investment objectives, asset allocation and overall financial situation. Different investors have different financial circumstances, and not all recommendations apply to everybody. Seek advice from your investment advisor before proceeding with any investment decisions. Various sources may provide different figures due to variations in methodology and timing,


6 Essential steps to diversify your portfolio

6 Essential steps to diversify your portfolio

Diversification is often considered the only free lunch in investing. In one of my earlier blog posts, I talked about the practical benefits of diversification. I explained the concept of investing in uncorrelated asset classes and how it reduces the overall risk of the investments.  In this article, I will walk you through 6 essential steps to diversify your portfolio.

1. Know your risk tolerance

Risk tolerance is a measure of your emotional appetite to take on risk. It is the ability to endure volatility in the marketplace without making any emotional and spur of the moment investment decisions. Individual risk tolerance is often influenced by factors like age, investment experience, and various life circumstances.

Undoubtedly, your risk tolerance can change over time. Certain life events can affect your ability to bear market volatility. You should promptly reflect these changes in your portfolio risk profile as they happen.

2. Understand your risk capacity

Often your willingness and actual capacity to take on risk can be in conflict with each other. You may want to take more risk than you can afford. And inversely, you could be away too conservative while you need to be a bit more aggressive.

Factors like the size of savings and investment assets, investment horizon, and financial goals will determine the individual risk capacity.

3. Set a target asset allocation

Achieving the right balance between your financial goals and risk tolerance will determine the target investment mix of your portfolio. Typically, investors with higher risk tolerance will invest in assets with a higher risk-return profile.

These asset classes often include small-cap, deep value, and emerging market stocks, high-yield bonds, REITs, commodities and various hedge fund and private equity strategies. Investors will lower risk tolerance will look for safer investments like government and corporate bonds, dividends and low volatility stocks.

In order to achieve the highest benefit from diversification, investors must allocate a portion of their portfolio to uncorrelated asset classes. These investments have a historical low dependence on each other’s returns.

The US Large Cap stocks and US Treasury Bonds are the classic examples of uncorrelated assets. Historically, they have a negative correlation of -0.21. Therefore, the pairs tend to move in opposite direction over time. US Treasuries are considered a safe haven during bear markets, while large cap stocks are the investors’ favorite during strong bull markets.

See the table below for correlation examples between various asset classes.

Asset Correlation Chart

4. Reduce your concentrated positions

There is a high chance that you already have an established investment portfolio, either in an employer-sponsored retirement plan, self-directed IRA or a brokerage account.

If you own a security that represents more than 5% of your entire portfolio, then you have a concentrated position. Regularly, individuals and families may acquire these positions through employer 401k plan matching, stock awards, stock options, inheritance, gifts or just personal investing.

The risk of having a concentrated position is that it can drag your portfolio down significantly if the investment has a bad year or the company has a broken business model. Consequently, you can lose a substantial portion of your investments and retirement savings.

Managing concentrated positions can be complicated. Often, they have restrictions on insider trading. And other times, they sit on significant capital gains that can trigger large tax dues to IRS if sold.

5. Rebalance regularly

Portfolio rebalancing is the process of bringing your portfolio back to the original target allocation. As your investments grow at a different rate, they will start to deviate from their original target allocation. This is very normal. Sometimes certain investments can have a long run until they become significantly overweight in your portfolio. Other times an asset class might have a bad year, lose a lot of its value and become underweight.

Adjusting to your target mix will ensure that your portfolio fits your risk tolerance, investment horizon, and financial goals. Not adjusting it may lead to increasing the overall investment risk and exposure to certain asset classes.

6. Focus on your long-term goals

When managing a client portfolio, I apply a balanced, disciplined, long-term approach that focuses on the client’s long-term financial goals.

Sometimes we all get tempted to invest in the newest “hot” stock or the “best” investment strategy ignoring the fact that they may not fit with our financial goals and risk tolerance.

If you are about to retire, you probably don’t want to put all your investments in a new biotech company or tech startup. While these stocks offer great potential returns, they come with an extra level of volatility that your portfolio may not bear. And so regularly, taking a risk outside of your comfort zone is a recipe for disaster. Even if you are right the first time, there is no guarantee you will be right the second time.

Keeping your portfolio well diversified will let you endure through turbulent times and help your investments grow over time by reducing the overall risk of your investments.

About the author: Stoyan Panayotov, CFA is a fee-only financial advisor based in Walnut Creek, CA. His firm Babylon Wealth Management offers fiduciary investment management and financial planning services to individuals and families.


Disclaimer: Past performance does not guarantee future performance. Nothing in this article should be construed as a solicitation or offer, or recommendation, to buy or sell any security. The content of this article is a sole opinion of the author and Babylon Wealth Management. The opinion and information provided are only valid at the time of publishing this article. Investing in these asset classes may not be appropriate for your investment portfolio. If you decide to invest in any of the instruments discussed in the posting, you have to consider your risk tolerance, investment objectives, asset allocation and overall financial situation. Different investors have different financial circumstances, and not all recommendations apply to everybody. Seek advice from your investment advisor before proceeding with any investment decisions. Various sources may provide different figures due to variations in methodology and timing, Copyright:

Top 5 Strategies to Protect Your Portfolio from Inflation

Top 5 Strategies to Protect Your Portfolio from Inflation

Protecting Your Portfolio from Inflation

The 2016 election revived the hopes of some market participants for higher interest rates and higher inflation. Indeed, the 10-year Treasury rate went from 1.45% in July to 2.5% in December before settling at around 2.35-2.40% at the end of February 2017. Simultaneously, the Consumer Price Index, which is one of the leading inflation indicators, hit a five-year high level at 2.5% in January 2017. As many investors are becoming more concerned, we will discuss our top 5 strategies to protect your portfolio from inflation.

Higher interest and inflation rates can hurt the ability of fixed-income investors to finance their retirement. Bonds and other fixed-income instruments lose value when interest rates go up and gain value when interest rates come down.

There were numerous articles in popular media about the “great rotation” and how investors will switch from fixed to equity investments in the search for a higher return. None of that has happened yet, and the related news has seemed to disappear.

However, the prospects for higher inflation are still present. So, in this article, I would like to discuss several asset classes that are popular among individual investors. I will explain see how they perform in the environment of rising inflation.


Cash is by far one of the worst vehicles to offer protection against inflation. Money automatically loses purchasing power with the rise of inflation. Roughly speaking, if this year’s inflation is 3%, $100 worth of goods and services will be worth $103 in a year from now. Therefore, someone who kept cash in the checking account or at home will need extra $3 to buy the same goods and services he could buy for $100 a year ago.

A better way to protect from inflation, while not ideal, is using saving accounts and CDs. Some online banks and credit unions offer rates above 1%. This rate is still less than the CPI but at least preserves some of the purchasing power.


Stocks are often considered protection tools against inflation. They offer a tangible claim over company’s assets, which will rise in value with inflation. However, historical data has shown that equities perform better only when inflation rates are around 2-3%. To understand this relationship, we have to look at both Real and Nominal Inflation-Adjusted Returns. As you can see from the chart below, both real and nominal stock returns have suffered during periods of inflation that is over 5% annually. Moreover, stocks performed very well in real and nominal terms when inflation rates were between 0% and 3%.

High inflation deteriorates firms’ earnings by increasing the cost of goods and services, labor and overhead expenses. Elevated levels of inflation have the function to suppress demand as consumers are adjusting to the new price levels.

While it might look tempting to think that certain sectors can cope with inflation better than others, the success rate will come down to the individual companies’ business model. As such, firms with strong price power and inelastic product demand can pass the higher cost to their customers. Additionally, companies with strong balance sheets, low debt, high-profit margins, and steady cash flows tend to perform better in a high inflation environment.

Real estate

Real Estate very often comes up as a popular inflation protection vehicle. However, historical data and research performed the Nobel laureate Robert Shiller show otherwise.

According to Shiller “Housing traditionally is not viewed as a great investment. It takes maintenance, it depreciates, it goes out of style. All of those are problems. And there’s technical progress in housing. So, the new ones are better….So, why was it considered an investment? That was a fad. That was an idea that took hold in the early 2000s. And I don’t expect it to come back. Not with the same force. So people might just decide, ‘yeah, I’ll diversify my portfolio. I’ll live in a rental.’ That is a very sensible thing for many people to do”.

Shiller continues “…From 1890 to 1990 the appreciation in US housing was just about zero.  That amazes people, but it shouldn’t be so amazing because the cost of construction and labor has been going down.”  Rising inflation will lead to higher overhead and maintenance costs, potential renter delinquency, and high vacancy rates.

To continue Shiller’s argument, investors seeking an inflation protection with Real Estate must consider their liquidity needs. Real Estate is not a liquid asset class. It takes a longer time to sell it. “Every transaction involves paying fees to banks, lawyers, and real estate agents. There are also maintenance costs and property taxes. The price of a single house also can be quite volatile.”  Just ask the people who bought their homes in 2007, just before the housing bubble.


Commodities and particularly gold tend to provide some short-term protection against inflation. However, this is a very volatile asset class. Gold’s volatility measured by its 42-year standard deviation is 33% higher than that of stocks and 3.5 times greater than the volatility of the 10-year treasury.  Short-term inflation protection benefits are often overshadowed by other market-related events and speculative trading.

Not to mention the fact that gold and other commodities are not easily available to retail investors outside the form of ETFs, ETNs, and futures. Buying actual commodities can incur significant transaction and storage cost which makes it almost prohibitive for individuals to physically own them.


According to many industry “experts” bonds are a terrible tool to protect for inflation. The last several years after the great recession were very good to bonds since rates gradually went down and the 10-year treasury rate reached 1.47% in July 2017.  The low rates were supported by quantitative easing at home and abroad and higher demand from foreign entities due to near zero or negative rates in several developed economies. As the rates went up in the second half of 2016, bonds, bonds ETFs and mutual funds lost value. While bonds may have some short-term volatility with rising inflation, they have shown a strong long-term resilience. The 42-year annualized return of the 10-year Treasury is 7.21% versus 10.11% for large Cap Stocks. The Inflation adjusted rate of return narrows the gap between two asset groups, 3.07% for bonds and 5.85% for stocks.

For bond investors seeking inflation protection, there are several tools available in the arsenal. As seen in the first chart, corporate bonds due to their stronger correlation to the equities market have reported much higher real returns compared to treasuries. Moving to short-term duration bonds, inflation-protected bonds (TIPS), floating-rate bonds, are banks loan are some of the other sub-classes to consider