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  1. Home
  2. / Investing

Now Is the Time to Play Defense

Remember, though, playing defense is very different than leaving the stadium altogether.
By JIM COLLINS
Dec 19, 2018 | 04:31 PM EST
Stocks quotes in this article: AMZN, AAPL, JNJ, KHC, T, FB, NFLX, GOOGL, TSLA

Well, that's it.  FOMC Chair Jerome Powell and his band of merry men and women just brought an end to the "Longest Bull Market in History."  Technically, that run will not end until the S&P 500 hits 2,345 -- down 20% from the all-time closing high of 2,930.75 it reached on September 20 -- but the S&P's recent plunge to 2,500 has been definitive.  It's over.  It was fun while it lasted, but now it is time to play defense.  

Remember, though, playing defense is very different than leaving the stadium altogether.  I am not advocating the strategies espoused by the parade of idiots who fill my email inbox with investing come-ons designed to spread fear.  I am not talking about any conspiracy theories, nor am I advocating that you follow the strategies espoused by the crackpots who spread them.  The world is not ending, and I don't believe the global economy is even heading for a normal recession.  But it is clearly slowing, and against that backdrop stocks just do not offer enough risk-adjusted return to justify not owning bonds.  That represents a complete reversal -- linguistically and strategically -- of the situation that prevailed for the past eight years.

So, don't dump all your stocks, don't grasp for "hard" assets like gold (which is also down significantly in today's post-Fed trading,) just show some common sense.  If your portfolio has been entirely composed of stocks you should change that. Today. Buy some bonds and go towards a classic asset mix.  I will not bore you with the academic arguments surrounding optimal portfolio construction, but I believe it is too late in the cycle -- and the Fed is too hawkish -- for a classic 60/40 stock/bond asset allocation.

At Portfolio Guru, LLC I have had my clients completely out of the S&P 500 for months now, but I can't tell you how many potential client portfolios I have looked at in the past six months that were entirely composed of U.S-listed stocks.  That dog will not hunt anymore.  Like Al Bundy did with footwear, I would like to put your assets in something comfortable and yet classy, so let's go with a mix of 40% stocks and 60% bonds.  

What to sell?  Well, that's where the taxman comes in.  Santa Powell did not deliver this year, so if you have losers in your portfolio, start there.  According to Bespoke Research, 55% of S&P 500 stocks have fallen at least 20% from their 2018 highs and 44% are down at least 25%.  While it is a given that every person who approaches me at cocktail party will have bought Amazon (AMZN) at $180, Apple (AAPL) at $60, etc., in the real world it is likely that you have some capital losses to harvest for tax reasons.  Do it!  

In terms of sectors, financials are the least attractive at this moment, as the yield curve has flattened dramatically today and is now threatening to invert.  You might assume some of the classic defensive sectors--food, pharma, consumer products--will offer protection against a bear market, but J&J's (JNJ) move this week shows that is no panacea.  Other supposedly defensive names like Kraft Heinz (KHC) and AT&T (T) have been absolute dumpster fires.  Energy stocks are just absolutely despised as a group, so despite another report full of positive news on oil fundamentals from the EIA today, you need to--as I mentioned in my RM column Tuesday-- exercise discretion with your investments in oil and gas.  Utilities and REITs have some appeal if interest rates continue to decline, as I believe they will.

But what of the market leaders?  The so-called FAANGs--Facebook (FB) , Amazon, Apple, Netflix (NFLX) and  Alphabet/Google (GOOGL) .  While I do agree with Snoop Dogg that there ain't no party like a West Coast party 'cuz a West Coast party don't stop, I am firmly convinced that the party is over for the stocks of the West Coast tech titans.  Watch levels here, because if AAPL breaks $160 and AMZN can't hold $1,500 there is massive downside for those two names.  Facebook is just completely univestable owing to its seemingly unending stream of revelations of data privacy issues and Alphabet's Google has similar difficulties.  At least those four stocks have strong balance sheets, though.  I believe debt- and content liability-laden Netflix could drop at least 50% from today's levels, and I have to mention Tesla (TSLA) here as another tech titan with a lousy balance sheet and a valuation that is at least 50% too high, by my calculations.  

Fed days are always eventful, but if you listen to the markets you will take risk off the table--and out of your portfolio--heading onto 2019.

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At the time of publication Collins had no position in the securities discussed.

Jim Cramer and the AAP team hold positions in Amazon, Apple, Facebook, Alphabet and Johnson & Johnson for their Action Alerts PLUS Charitable Trust Portfolio . Want to be alerted before Cramer buys or sells AMZN, AAPL, FB, GOOGL or JNJ? Learn more now.

TAGS: Investing

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