Indicators That Preceded Past Downturns Are Flashing Now
So much for new market highs every other day…or so it seemed. After the market rout on the last day of July, the Dow Jones Industrial Average was basically flat year to date with the S&P 500 up 4.4% as of the end of July.
If you are a dedicated reader of these weekly columns, you know that I don’t get too excited by big one-time gains nor do I panic when the Dow has a 300 point loss. My bigger concern is always the longer term picture when it comes to the markets and the economy.
Probably what’s on many investors’ minds is whether the bull market can continue or whether we’re facing an imminent bear market. As usual, my crystal ball is cloudy but a few articles I read in the past week are worth digesting.
The first is a column written by CNBC’s Jeff Cox on Tuesday entitled “Goldman: ‘Dramatic divergence’ coming in the market.” The good news according to an analysis by Goldman Sachs (click here to read article) is that stocks will significantly outperform bonds in the years ahead since interest rates are bound to rise one of these days…or years. That was the positive part of the analysis.
On the negative side, Goldman sees the S&P 500 stock index only returning 6.2% between now and 2018. If these folks are correct, we will see S&P at 2,300 by the time 2018 rolls around.
While this doesn’t sound too bad, the one thing we know is that markets don’t often go straight up. Are we in for a “correction” or worse, a “bear market” where stocks drop 20% or more? Who knows? In last Saturdays Weekend Investor section of the Wall Street Journal, Mark Hulbert wrote a column (click her to read article) entitled “Three Signs That Point to a Stock-Market Tumble Ahead.” Wonderful!!!
Hulbert points out that since 1970 when three market indicators start flashing, as they are now, the S&P 500’s “average subsequent decline on those earlier occasions was 38%, with the smallest drop at 22%.” Looking for some solace? According to the column, blue-chip stocks that pay large dividends will lose the least in any decline. We shall see.
As both a registered investment advisor and insurance licensed, I most often have some of our clients’ money in the market, some in FDIC insured bank instruments (CDs, money market funds, etc.) and some in boring old annuities, mostly with lifetime income benefit riders. My goal is to always make sure we have enough safe money in everybody’s portfolio so that market swings won’t cause too much agita.
Are you comfortable with the amount of market risk vs. safe money percentages in your portfolio? If not, give me a call or shoot me an e-mail and we can match up calendars.
Have a fun weekend…
Your Retirement Quarterback®