Storm Clouds Gather
Large mountains create their own largely unpredictable weather, but early indications of trouble are often still perceivable by those paying particular attention. The one-week Valley forecast reveals major systems approaching, always unleashing intensified effects up top, while the two-day summit forecast offers a 51% probability of conditions above treeline for the period. Cumulonimbus clouds forewarn heavy precipitation, Lenticular formations precede high winds, and Cirrostratus arrangements indicate an approaching storm within 12-24 hours. Troubling developments in the counterintuitive stock market, often driven by the subjective emotions of a mass of human investors, can be even more difficult to perceive; nevertheless, reliable gauges exist and are useful to market navigators paying particular attention. Consider the issues that are giving highly respected investors cause for concern today:
As a rule, yield curve reversions shortly precede major bear markets and recessions, and the very long and very deeply inverted yield curve since 2022 just turned positive again.¹
As a rule, Federal Reserve (‘the Fed’) interest rate reduction campaigns accompany economic recessions and bear markets, and ‘the Fed’ recently started lowering interest rates.
Consumer spending, which accounts for two-thirds of the U.S. economy, is slowly weakening.² Consumer debt levels are high and warnings of a ‘tapped’ consumer are surfacing.
While ‘the Fed’ clings to its victory dance over inflation, inflation is rising again.³ After badly misdiagnosing the entrenched inflation it had created in the pandemic, ‘the Fed’ is now lowering rates in the absence of an earnings recession as inflation rises. Admire Powell’s boldness, but do not trust his judgment!
Stock valuations by nearly every reliable metric are among the highest in recorded history, a dynamic usually followed by terrible ten-year future stock returns.
Favorable sentiment has arrived for retail investors, always the last to show up for the party. When this group becomes obstinately euphoric, go on high alert.
Warren Buffet and other notable investors are quietly raising large cash positions to a) protect their capital, and b) ensure their ability to buy great companies at deep discounts in the coming sell-off.
The bond market is signaling trouble ahead by demanding more interest to compensate for the risk of holding longer-term bonds, and it’s doing this AS ‘the Fed’ lowers its key rate. Bond investors are among the most learned economists on earth, and ‘Fed’ members are among the least.
While these issues are concerning, recognize the fact that bull markets die in euphoria and can remain irrational longer than you think. This bull market can go higher, even much higher, before it concludes. Imagine an experienced mountaineer who sees potential for bad weather while cautiously advancing to the summit, their plan for retreat actionable upon specific stimuli with climber on constant, vigilant alert. Have an exit plan in place and ride the bull with peace of mind.
Think about it, Shaun.
“Be fearful when others are greedy, and greedy when others are fearful” ~Warren Buffet
“Give a portion to seven, or even to eight, for you know not what disaster may happen on earth.” ~Ecclesiastes 11:2
1 U.S. Global Investors, “The Yield Curve Inversion Just Ended”, September 6, 2024
2 Barron’s, “Consumer Spending is Starting to Flash a Warning Sign”, September 3, 2024
3 U.S. Bureau of Labor Statistics, Consumer Price Index, November 8, 2024 https://www.bls.gov/cpi/
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any opinions or forecasts contained herein reflect the subjective judgments and assumptions of the author.
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