For months we have been cautioning investors about the dangers that we see ahead in the investment world, specifically in the bond market and in the equities markets. While nobody likes a “party-pooper,” we feel that it would be a disservice to not point out the problems that we see coming down the road.
This week Forbes released an article titled “These 23 Charts Prove That Stocks Are Heading For A Devastating Crash.” In this piece, contributor Jesse Colombo provides data and analysis that your typical investors would never come across that point towards troubling times. We cannot say definitively whether or not we are due for a crash, however a significant correction would not surprise us in the least. The following is just a few pieces of data from the article:
Equities are up nearly 3x since the market bottom in 2009 with no major market correction (I covered the rise in stocks without a significant correction back in January in “How High Can Equities Go?”)
The Fed Funds Rate has remained at or near 0% for over 5 years, and was at a historically low rate right before the Credit Bubble burst in 2008.
NYSE Margin debt is peaking, which it also did during the Dot-Com bubble, the Credit Bubble.
The Volatility Index (VIX) is reaching multi-year lows, which is a sign of complacency that typically precedes a market decline.
Corporate borrowing is reaching the highest levels it has seen since the Credit Crisis, and those levels were the highest seen since the Dot-Com Bubble.
Corporate stock buybacks (financed by borrowing) are also at the highest levels seen since the 2 previous economic bubbles.
Colombo goes in to several other useful analytics that we recommend everyone take a look at.
Regarding bonds, we have been warning investors about the long term problems with the bond market since 2012 in my piece “Bubbling Bonds.” That article explains the interest rate to par value relationship and how rising interest rates hurt bond funds. In his piece, Colombo pointed out that low yields on 10 year treasury bonds have pushed would-be bond investors into the stock markets in an attempt to earn a return, which has further inflated the equities bubble.
As I said, nobody likes to hear a Negative Nancy, but we find ourselves in that position. Every market fundamental tells us that we are due for an intense if not severe market correction. It has been brewing for over 5 years, and numerous economists have warned about the negative effects of our current fiscal and monetary policies. That is not to say that the US economy is heading for complete catastrophe, however we are awaiting a market correction unlike any that you have seen in the last 5 years.
If the market begins on a downward trend, have a strategy in place; do you want to be out early and miss potential gains, try to time the peak (which is virtually impossible), or sell on the downside when there is less liquidity in the markets than when selling on the upside? Another option is to ride out the correction and see where you end up on the other side; you do have options. If you do not have a plan, now might be the time to devise one. Don’t say we didn’t warn you.