The Market is Headed Lower… Do This Now

By Matthew Milner, on Wednesday, April 6, 2016

It’s dark days for stock market investors:

A year ago, on April 6, 2015, the S&P 500 was trading at about 2,050...

52 weeks later, after all its ups and downs, that’s exactly where it’s trading today.

No one knows for sure, but if U.S. GDP numbers are any indication, the market might stop treading water... and start plummeting instead.

Thankfully, there’s a way for you to get out of this mess:

You see, there’s a certain “signal” that investment professionals keep an eye on.

When it gets triggered, they know it’s time to make a specific money-making move.

And to make a long story short, it just got triggered.

When These Two Things Happen—Run!

As I just reminded you (sorry), the S&P 500 isn’t growing at all right now…

Over the last year or so, it’s had zero net gains. That’s the first signal you need to watch out for.

Here’s the second:

U.S. economic growth has been weak, and it’s getting weaker…

In Q4 of 2015, U.S. GDP slowed to 1%. (That’s versus 3.5% in Q4 2013, and 2.2% in Q4 of 2014.) And Q3 numbers are just as bad: in Q3 2014, GDP grew 5%. In Q3 2015, it grew just 2%.

When these two signals happen at the same time—feeble performance in major indexes like the S&P 500, plus weak economic growth—history shows that it’s time to make a strategic move.

$4.6 Trillion Worth of Advice

Cambridge Associates is a leading investment advisor.

It specializes in helping professional investors—from The Rockefeller Foundation and Harvard University, to the Bill and Melinda Gates family office—determine how to allocate their capital.

The company has 1700 employees, and more than $4.6 trillion under advisement.

Recently, it published some fascinating data.

The data reveal that, historically, during periods of feeble performance in the stock market and weak GDP growth, a certain asset class tends to do very well.

Can you guess what that asset class is?

The Answer is… Private Equity

When you invest in private equity, you’re investing in a private company—a company that isn’t publicly traded on a stock exchange like the NYSE.

The start-ups and pre-IPO companies we cover at Crowdability are all examples of private equity.

As we often write about, the key to making money in private equity (and actually, making money in all investments) is to “buy low and sell high.”

So perhaps the data from Cambridge Associates shouldn’t come as a surprise:

When the market and the economy are performing poorly, business tends to dry up—and this puts private companies, especially start-ups, in a vulnerable position.

You see, most young companies aren’t self-sufficient. Until they get on their feet, they spend more money than they bring in.

If they need a cash infusion to stay on their feet when the market and economy are on an upswing, it’s relatively easy for them to raise more capital…

But when the environment is less promising, it becomes harder for them to raise capital, and this allows investors to gain leverage. In particular, investors can negotiate more favorable terms—including a lower investment price.

And by investing at a lower price (by “buying low”), these investors have a higher likelihood of cashing out later at a profit.

As it turns out, the data prove out this “buy low, sell high” hypothesis—take a look at this chart to see what I mean:

The chart might look complicated, but it tells a simple story:

As you can see, during the 80s and early 90s, the S&P 500 (the yellow line) went through good and bad periods. But during those periods, GDP (the bright blue line) continued to grow.

The fact that only one of our signals got triggered helps explain why the S&P continued to perform reasonably well relative to private equity (the purple line).

But during the mid-to-late 90s, we saw the S&P and GDP declining—in other words, both signals got triggered—and that’s when the relative returns from private equity shot right up.

And as you know now, the stage is set for the same scenario to happen today.

Shift a Little Bit

To be clear, we’re not saying you should sell all your stocks and put the money into start-ups.

What we’re saying is that, historically, private equity has tended to add the most value for investors when both the market and the economy are weak—environments like the one we’re in right now.

And by shifting a small percentage of your portfolio to private equity—say, 5% or 10%—you’ll be able to capture this outperformance without taking on excessive risk.

As Wayne wrote about recently, this is a low-risk diversification strategy that can dramatically increase your returns »

And most importantly, it’s a strategy that you’ll finally be able to get in on:

On May 16th, just six weeks from now, Title III of the JOBS Act goes live.

This law change will finally allow all U.S. citizens—not just Harvard and Bill and Melinda Gates—to invest in private equity.

It couldn’t have happened at a more perfect time.

Best Regards,
Matthew Milner
Matthew Milner


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Tags: Private Alpha Non-correlated Assets

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