Prepare For "The Mother Of All Blow-Off Tops"
Asset prices bubbles follow a predictable trajectory, driven by investor psychology:
The final stage before the bursting is a Euphoric peak.
The financial advisors at New Harbor Financial think we're on our way to such a blow-off top, but we're not quite there yet. They expect the action to get even more manic before we do.
If Euphoria indeed arrives, prices will likely zoom to highs that just seem silly right now.
Prepare yourself for this: you will not believe what your eyes are telling you.
But also prepare for this peak to be very short-lived.
Be very cautious about getting sucked in, because the gains will likely evaporate quickly once the downcycle begins.
This is why bubbles are so destructive to so many people -- especially those who go "all in" at the top.
Here are my key takeaways from the discussion:
Historical evidence suggests that political shifts, such as a Republican sweep, do not guarantee favorable market outcomes. During George W. Bush's presidency, the S&P 500 posted negative returns despite tax cuts and deregulation policies, mainly due to overvaluation following the tech bubble. Similarly, the current market is significantly overvalued, with cyclically adjusted PE ratios at levels seen during prior market peaks.
The market appears poised to move from the "thrill" phase to "euphoria," characterized by rapid gains fueled by fear of missing out (FOMO). Examples include predictions of the S&P 500 surging 1,000 points in a month. Drawing on historical bubbles, such as the South Sea Bubble, investors are cautioned against letting emotions drive decisions, as this often leads to regret during sharp corrections.
New Harbor maintains a balanced stance with 38-40% equities, deliberately avoiding full exposure in a historically overvalued market. Of this allocation, 10% is directed toward mid-cap stocks, which show sustained outperformance and no signs of reversal. This allocation remains unhedged to capture potential short-term gains while closely monitoring risks.
The team has identified strong relative performance in specific sectors, including
financials, industrials, utilities, REITs, and telecom. These sectors are included in the portfolio based on ongoing analysis of their strength relative to other market groups. Mid-cap stocks are particularly highlighted as leaders in the current market environment, making them a central focus of their strategy.
Practical actions for year-end include Roth IRA conversions, which allow for tax-efficient growth; charitable giving to reduce taxable income; tax-loss harvesting to offset gains; and meeting RMD requirements to avoid penalties. For instance, converting a portion of a traditional IRA into a Roth IRA within a 12% tax bracket can maximize long-term growth while minimizing tax burdens.
New Harbor emphasizes the importance of preparing for incapacity or death by introducing spouses or family members to financial advisors and establishing clear plans. A recent example involved guiding a couple to schedule an estate planning consultation, which gave them peace of mind. Succession planning ensures continuity and prevents financial mismanagement by uninformed heirs.
The firm tailors’ strategies based on individual risk tolerance and goals. Tools like collar hedging provide downside protection while allowing for potential gains, enabling clients to spread tax liabilities over multiple years. This approach balances participation in market growth with the need to mitigate risks in uncertain conditions.
Investment trends often defy conventional expectations. For example, renewable energy outperformed traditional oil and gas during Trump's presidency, contrary to assumptions about Republican policies favoring fossil fuels. Conversely, under Biden’s term, renewable energy investments have underperformed significantly. This underscores the importance of relying on market data and relative strength indicators rather than assumptions or political narratives.
For the full interview with the New Harbor team, watch the video below:
___________________
For more deep-dive macro interviews like the one above, sign up for our free newsletter at: https://thoughtfulmoney.
To schedule a free consultation with one of Thoughtful Money's recommended financial advisors, fill out the short form at: https://thoughtfulmoney.