Category Archives: Investing Money

We’re nearly at zero: The US just passed another flashing-red indicator on the way to recession

My Comments: Anyone of you who has money invested or is dependent on cash flow from your investments to pay your bills needs to be concerned. What follows is a very good explanation for anyone who whose time horizon for retirement is less than 10 years.

Uncertainty is the biggest driver of global pullbacks in interest rates and growth numbers. Right now, not only from a normal cyclical ebb and flow of economic activity but from the uncertainty generated by the confusion promoted by Trump, we are on the cusp of a significant pull back.

Me, I’m moving my money into cash over the next few weeks. If not sooner… One reason is that people tend to anticipate what will happen to their money before it becomes obvious. Which means that a market crash will precede the economic downturn.

By Jim Edwards, July 16, 2018

The yield on 10-year US Treasury notes declined for a fifth consecutive week, taking the US economy yet another step toward recession. A contraction in America would hurt growth across the planet.

Treasury yields don’t automatically trigger recessions, of course.

But there has been a worrying historical correlation between the moment that the percentage yield on the two-year Treasury becomes greater than the yield on the 10-year note. That phenomenon is called a “yield curve inversion,” and it means that investors are so worried that they’re much less likely than normal to bet on short-term assets.

In layman’s terms: Bonds are about safety for investors. If you buy a two-year note, you can be reasonably sure that you’ll get your money back in two years’ time. Two years isn’t very far away, after all. The near-term is easier to predict than the long-term. So yields (the amount you get back) are lower for short-term notes, because the risk is lower, and thus the reward is lower too.

Ten-year notes represent the opposite bet. They are riskier because who knows what will happen in 10 years’ time? So yields on long-term notes are higher because there is more uncertainty until you get your money back.

When the opposite happens — and investors signal that the short-term feels riskier than the long-term — something must be wrong. If investors say they have less idea of what’s going to happen in two years than 10 years, then they must be very worried about the near-term — and that is a pretty good signal of an impending recession.

When the two-year exceeds the 10-year, recessions tend to follow in short order.

This chart from FRED shows it best. We’re closer to an inverted yield curve than at any time since 2005-2007, which was right before the great financial crisis of 2008:

At the moment, we’re still above the zero-percent-difference line. But only just. The yield curve is flattening, not inverted. We’re trading at 25 basis points on Monday, the flattest since 2007.

There is one reason not to panic. The yield curve doesn’t say that a recession will come imminently. Just … sometime soon. Macquarie analyst Ric Deverell and his team told clients recently that even if the curve was inverted, a recession might not show up until 2019, based on the historic record:

“Historically, the term spread has been one of the best indicators of a forthcoming recession … Indeed, each of the five most recent recessions were preceded within two years by an ‘inverted’ yield curve, with only one false signal (the yield curve very briefly dipped into negative territory in mid-1998, during the Russia crisis and the collapse of Long Term Capital Management, around 33 months before the cyclical peak).”

“On average, the lag between yield curve inversion and the onset of a recession is around 15 months. … Even if the current trend pace of flattening since 2014 were to persist, the curve would not invert until the middle of 2019.”

The global economy doesn’t look like it’s facing a recession — there is widespread GDP growth in the US, Europe, Asia and China. Nonetheless, the current expansion is one of the longest on record, and the economy tends to move in boom-bust cycles. We’re due for a bust, frankly.

There is another big difference between today and 2005: Central banks the world over have been buying bonds like crazy for nearly 10 years to keep interest rates down and to fuel the economy via so-called “quantitative easing.” That has artificially depressed bond yields, and it means that this time around the yield curve is not the reliable predictor of recession it used to be. That’s the position of UBS economist Paul Donovan, for instance.

Of course, when smart people start saying a recession won’t happen because “this time it’s different” — that’s also an indicator of impending recession.

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The market will crash this year — and there’s a good reason why

My Comments: Frankly, I have no idea if it will or not, but I tend to pay attention when people smarter than I start talking about stuff that is clearly an existential threat to my financial well being and that of my clients, family and friends.

If the money you have saved is critical in terms of being able to pay your bills in the future, there are ways to protect yourself against downside risk and still participate in the upside promise of the markets.

Thomas H. Kee Jr. / President and CEO of Stock Traders Daily / April 25, 2018

The market is going to crash this year, and there is a very good reason why. The amount of money chasing stocks is drying up considerably, natural conditions are prevailing, and it is happening on the heels of the most expensive bull market in history.

The stimulus efforts of global central banks created a fabricated demand for stocks, bonds, and real estate, ever since the credit crisis, but as of April 2018 those combined efforts are now a drain on liquidity. As recently as last September the combined effort of the ECB and the FOMC was infusing $60 billion per month into these asset classes, like they had almost every month since the credit crisis — but now they are effectively selling $30 billion of assets per month. That is a $90 billion decline in the monthly demand for assets in seven short months.

Central banks are now a drain on liquidity, and it is happening when natural demand levels are significantly lower than where current demand for stocks, bonds, and real estate appears to be.

According to The Investment Rate — an indicator that measures lifetime investment cycles based on ingrained societal norms to identify longer term stock market and economic cycles in advance — we are currently in the third major down period in US history. The rate of change in the amount of new money available to be invested into the U.S. economy declines every year throughout this down cycle, just like it did during the Great Depression and stagflation. This down cycle also started in December of 2007.

Although the market began to decline directly in line with The Investment Rate’s leading indicator, the declines did not last very long. The Investment Rate tells us that the down period lasts much longer than just the credit crisis, and the declines The Investment Rate suggests are rooted in material changes to natural demand levels based on how we as people invest our money, so it identifies natural demand. The natural demand levels identified by The Investment Rate are much lower, and they decline consistently from 2007.

As much as The Investment Rate serves to identify natural demand levels, when stimulus was introduced by Ben Bernanke a second source of new money was born. The stimulus efforts by the FOMC and the ECB added new money to the demand side of stocks, bonds, and real estate, with the intention of spurring prices higher to induce the wealth affect. The policies were successful, asset prices have increased aggressively, but there are repercussions.

Asset prices increased so much that the valuation of the S&P 500, Dow Jones industrial average, Russell 2000, and NASDAQ 100 at the end of last year made them more expensive than in any other bull market in history. In other words, we just experienced the most expensive bull market in history, and the PE multiple of 25 times earnings on the S&P 500 was driven by the constant capital infusions coming from central bank stimulus programs.

Not only were these programs unprecedented given their size, but they also told us what they were going to buy, when they were going to buy it, and how much they were going to buy, every month, in advance, every year since the credit crisis. At no time in history has Wall Street been able to identify when buyers were going to come in like they have during this stimulus phase.

However, now the stimulus phase is over and not only are these central banks no longer a positive influence on liquidity, but they are now removing liquidity from the financial system as well.

This is happening at a time when natural demand levels as those are defined by The Investment Rate are also significantly lower than where demand currently seems to be, and that creates a double whammy on liquidity. The demand for equities this year is far less than it was last year as a result of these two demand side factors. Because price is based on supply and demand, and because demand is cratering, prices are likely to fall. This applies to stocks, bonds, and real estate.

Vanguard’s Chairman Sees Muted Decade for Stocks After Long Rally

My Comments: Little is said these days about those who are investing for the future and are still working vs those investing for the future who are no longer working. Think of it as being defined as the accumulation phase of your life vs the distribution phase of your life.

Different rules apply. Vanguard Funds founder John Bogle famously suggested that the bond part of your portfolio, presumably the ‘safe’ part, should be equal in percentage terms to your age. If you were 70, for example, 70% of your portfolio should be in bonds.

Demographics, interest rates, and the profusion of new financial products has largely put Bogle’s dictum to bed. But it does illustrate the continued confusion caused by those who fail to recognize the difference between someone in their 50’s working hard to accumulate a sufficient pile of money for retirement from someone in their 70’s trying to make sure they don’t run out of money before they run out of life.

We are currently conditioned to positive returns from the markets, except for 2015, that started as we emerged from the Great Recession of 2008-2009. Those of you in the distribution phase of your life need to heed the warning expressed here.

By Nico Grant | January 17, 2018

F. William McNabb, Vanguard Group’s chairman, cautioned investors to consider reducing their stock exposure before the nearly 9-year-old rally ends.

“We would expect the next decade to actually be very modest on the equities side in the U.S., a little less so in Europe and a little less so in Asia,” McNabb said in a Bloomberg Television interview that aired Thursday. “But it’s still overall lower than long-term historical averages.”

Stock markets reached a fever pitch in 2017 as the S&P 500 Index hit record highs and the rally has continued this year. The advance, buoyed by low interest rates around the world, economic growth and the U.S. tax overhaul, has sparked concerns that valuations have gotten stretched, spurring some investors to brace for a decline.

McNabb, whose firm oversees about $5 trillion, said long-term investors may benefit by holding balanced portfolios with bonds as well as stocks.

“No one can predict what’s going to happen in the next 12 months,” he said. “Having just said that, I’m sure the equity market will continue to skyrocket for the next few months.”

McNabb, who ceded the role of chief executive officer of the Valley Forge, Pennsylvania-based firm to Tim Buckley this month, spoke to Bloomberg in Beijing, where Vanguard is eager to take advantage of China’s opening to foreign financial-services companies. The country’s government said it plans to remove ownership limits on banks and allow overseas firms to take majority stakes in local ventures.

“With some of the changes, it looks like there may be a path to doing retail mutual funds, depending on how things get interpreted,” McNabb said.

How your 401(k) can survive and thrive in the next bear market

My Comments: Some of you reading this have money in 401(k)s and 403(b)s and cannot simply remove it and place it somewhere safer. Which means you’re completely exposed to the vagaries of the markets and you can only hope for the best.

I learned long ago that HOPE is not an effective investment strategy. So these words from Adam Shell may make your life a little easier. If you want more information, you know how to reach me.

Adam Shell, March 9, 2018

The nine-year stretch of rising stock prices won’t last forever. So now’s a good time for investors to bear-proof their 401(k)s before the next financial storm.

The current bull market, now the second-longest ever and celebrating its 9th birthday on Friday, is most likely in its final stages, Wall Street pros say. That means a bear market will occur at some point, and the stock market will tumble at least 20% from its peak.

What could cause it and when? No one can know for sure. A recession perhaps, or a surge in interest rates and inflation? An unexpected event or investors getting too giddy about stocks and driving prices up to unsustainable levels? All could be the triggers of a big drop in stocks.

Remember, if you have any money invested in stocks, you won’t be able to avoid all the pain that a bear inflicts on your 401(k). While a drop of 20% from a prior peak is the classic definition of a bear market, most drops are more sizable. The average decline for the Standard & Poor’s 500 stock index in the 13 bears since 1929 is 39.9%, S&P Dow Jones Indices says. A swoon of that size would shrink a $100,000 investment in an index tracking the broad market to roughly $60,000.

Prepare ahead of time

“The best way to survive a bear market is to be financially prepared before one happens,” says Jamie Cox, managing partner for Harris Financial Group.

That means not having 100% of your money invested in stocks near a market top. It also means maintaining low levels of debt and having some emergency savings to avoid having to sell stocks in a down market to raise cash, he says.

From a portfolio standpoint, make sure your investment mix isn’t too risky. Are you loaded up on high-fliers that have greater odds of suffering steep drops if the market tanks? Make sure you own some “defensive” stocks, such as utilities, consumer companies that sell everyday staples like soap and cereal, or health care names, which tend to hold up better when markets fall overall.

“Investors should take the time to control the parts of their portfolios they can control,” Cox advises.

If, for example, your portfolio was designed to have 60% in stocks, and that percentage has ballooned to 80% due to the long period of rising stock prices, consider “rebalancing” your portfolio now. Sell some stock to get back to your initial 60% target.

Play defense

The time to be aggressive in the market is when stocks are up, and you can make tactical moves likes cashing out stocks, says Woody Dorsey, a behavioral finance expert and president of Market Semiotics, a Castleton, Vt.-based investment research firm. It makes more sense, he adds, to be defensive when the market is entering or in a period of falling prices.

“Does a bear market mean an investor needs to freak out? No. But it does mean you should be more careful,” Dorsey says. “If the market is going to be difficult for one or two years, just get more defensive. Keep in simple.”

One simple strategy to employ is to get “less exposed to the market and raise cash,” Dorsey says. “Most people are not used to that message, but it’s a good message.” While a normal portfolio might consist of 60% stocks and 40% bonds, a bear market portfolio, he says, might be 30% cash, 30% U.S. stocks and the rest in foreign investments and bonds.

Main Street investors could also consider defensive strategies employed by professional money managers, he says. They can buy things that hold up better in tough times, such as gold. Or add to “alternative” investments that rise when stocks fall, such as exchange-traded funds that profit when market volatility is on the rise or funds that can short the market, or profit from falling prices.

Identify severity of bear

The next bear isn’t likely to be as severe as the epic one following the Great Recession or the dive in early 2000 after the dot-com bubble burst, says Liz Ann Sonders, chief investment strategist at Charles Schwab. Both of those bears saw market drops of about 50% or more.

“The next bear will be a more traditional one that likely comes from the market sniffing out a coming recession,” she explains. “We don’t think it will be caused by a global financial crisis or bubble bursting.”

That means fear levels likely won’t spike quite as high. Investors will also have a better idea of when the bear market might hit, as it will be foreshadowed by signs of a slowing economy.

It also suggests the market will likely rebound more quickly than the average bear of 21 months. As a result, employing basic investment principles, such as portfolio rebalancing, diversification and buying shares on a regular basis, which forces folks to snap up shares when prices are cheaper, can help investors emerge from the next bear market in decent shape.

“Diversification and rebalancing are boring to talk about,” says Sonders. “But they are more useful strategies than all the hyperbole on when to get in or get out of the market, which is not an investment strategy.”

Buy the ‘big’ dips

There are big market swings even in bear markets. A way investors can play it is to buy shares on the days or periods when stocks are under intense selling pressure. “There will be lots of wild swings,” says Mike Wilson, U.S. equity strategist at Morgan Stanley.

Investors have to take advantage of stock prices when they are depressed and present good value, he says, even if it seems like a scary thing to do at the time.

“You have to be willing to step in” when market valuations fall a lot, no matter what’s going on in the world, Wilson advises.

The Market Is Finally Getting the Joke

My Comments: I struggle, day to day, just like you, to figure out what the markets are going to do because so many of my friends and clients are exposed to market risk. Are you exposed to market risk? Does it worry you at all?

If not, you don’t need to read this. But if it does worry you, then perhaps a few minutes reading these comments from Scott Minerd will be good for you. And oh yes, there are ways to shift the risk of a downward correction to an insurance company and by so doing, preserve your principal and market gains from a crash.

Scott Minerd, February 21, 2018

The last two weeks have been pretty exciting, certainly a lot more interesting than anything we’ve been through over the last year. Given the recent market dislocation, there is a basis to rebalance portfolios and do trades to take advantage of relative repricing. At a macro level, it should not surprise anyone that rates have begun to rise—we have been talking about the Federal Reserve (Fed) tightening, we have been talking about how the Fed is behind the curve, how the market has not believed the Fed, and that someday this was going to have to get resolved, probably by the market having to adjust to the Fed’s statements. The market has now gotten the joke. I still don’t think the yield curve is accurately priced, but it is a lot closer today than where it was at the beginning of the year.

The concern, as I explained in A Time for Courage, is that now the market is moving from complacency—where it really did not believe the Fed was going to do what it said it was going to do—to a time when it has begun to realize that the Fed may be behind the curve. The market is now coming to believe that the Fed is not going to make three rate increases this year, it is going to make four. And so, rates start to rise and the whole proposition that the valuation of risk assets is based upon, which is faith in ultra-low rates and continued central bank liquidity, comes into question. As markets lose confidence in that view, investors have started to rearrange the deck chairs by repositioning portfolios.

Anytime we see strength in economic data, we are going to see upward pressure on rates. Upward pressure on rates is going to result in concern over the value of risk assets, and we are going to have a selloff in equity markets, or the junk bond market, or both. Credit spreads will widen. The reality of the situation, however, is that the amount of fiscal stimulus in the pipeline, the U.S. economy fast approaching full employment, the economic bounceback in Europe, and the pickup in momentum in Japan and in China are all real. Against this backdrop, even a harsh selloff in risk assets is not going to derail the expansion.

The Fed knows this, and for that reason the Fed is shrugging its shoulders and saying, “Okay, we don’t have a mandate around risk assets, but we do have a mandate about price stability and full employment. And it looks like we’re at full employment or beyond full employment, and the thing that seems to be at risk now is price stability. We’ve got to raise rates.”

What does that mean for investors? Markets are engaged in a tug of war between higher bond yields and the stock market. In the near term, the two markets will act as governors on each other: Higher bond yields will drive down stock prices, and lower stock prices will cause bond yields to stop rising and to fall.

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“The market is moving from complacency about the Fed to realizing that it may be behind the curve.”

Scott Minerd

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An analogue to today may be 1987. That year began against the backdrop of 1985/1986, which had seen a collapse in energy prices. In 1986 oil prices were very low, and concerns around inflation had diminished. The Federal Reserve had dragged its feet on raising rates. As we entered 1987, in the first few months of the year the stock market took off. By the time we got to March, stocks were up 20 percent. In April there was a hard correction of approximately 10 percent. As fear overtook greed, market participants became cautious on stocks. Going into that summer the stock market rallied another 21 percent from the April lows. By August we were at record highs; interest rates started to move up; the Federal Reserve was raising rates; the dollar was under pressure; and there were increasing concerns over inflation. The concern was the Fed was behind the curve as it accelerated rate increases. By October things were becoming unhinged. Bond yields had risen in the face of an extended bull market in stocks. The market reached a tipping point and began its infamous slide. By the time we got to the end of the year, the stock market for the year was up just 2 percent. That was the stock market crash of 1987, which wiped out about a third of the value of equities in the course of a few weeks.

Today, investors have the same sorts of concerns they had in 1987. For now, the market has gotten a reprieve. Soon, investors will start to have confidence in risk assets again. Risk assets like stocks will start to take off. Eventually, the perception will be that the Fed is falling behind the curve because inflation and economic pressures will continue to mount. Eventually the Fed will acknowledge that three rate hikes will not be enough, but it is going to raise rates four times in 2018, and market speculation will increase that there may be a need for five or six rate hikes. That will be the straw that breaks the camel’s back.

This is a highly plausible scenario for this year, but who knows how these things play out in the end. The reality today is that the economy is strong, interest rates are rising, and equities look fairly cheap. The Fed model right now would tell you the market multiple should be 34 times earnings. That is just fair value, not overvalued. And based on current earnings estimates for the S&P this year, the market multiple is closer to 17 times earnings. If stocks go down by 10 percent, the market multiple would drop to 15 times earnings. This would be getting into the realm of where value stocks trade. If there were a 20 percent selloff, you’re at a 14 times multiple. These market multiples don’t make sense. Markets do not price at 14 times earnings in an accelerating economic expansion with low inflation.

Here’s Why Markets Will Head Downward

My Comments: Now that I’m in my mid 70’s, I’m far more worried about the ups and downs of the markets than I was 15-20 years ago. My ability to pay my monthly bills shrinks exponentially when the market crashes and my retirement money is exposed to that risk.

Ergo, I either do not have much money exposed to that risk, or I’ve repositioned it such that if there is downside risk, I’ve transferred that risk to a third party, ie an insurance company. You should consider doing the same.

BTW, QE means ‘quantitative easing’ and refers to the approach by the Federal Reserve to lower interest rates and to keep them low. That has  ended since the Fed is now slowly raising interest rates.

Clem Chambers,  Feb 12, 2018

I’m completely out of the markets in the U.S., Europe and the U.K. It seems as clear as it can be that the market is in for a huge down.

Now there are permabulls and permabears and if you read my articles over the years calling higher highs in the Dow you might think I am a permabull. But I am not, and if you hunt enough you will find my articles calling the credit crunch back in 2006-2007 here on Forbes and again the post crash bottom to buy in.

I can, and do, go both ways.

It has to be said, calling the market tops and bottoms is a tricky business and you can’t always be right, but there is only one thing you need to know and only one thing you have to know when investing and that is, “which way is the market going. ”

It sounds simple, almost asinine, but it isn’t because most people have no view on market direction, or if they do it’s automatically ‘up.’ As such, most people do not know which way the market is going and as such are at more risk that they need to be.

So where are we now in the markets?

Well, here is history:


This is a terrifying chart for anyone who is long.

Why? Well, first off you can see the very characteristics of the way the market moves have changed for the first time in years. Up close it’s even clearer:

The market has been going up like an angel for a year, the volatility has fallen to nonexistant. Forget the tendency for the price to go parabolic, it’s the day to day footprint of the price action that’s even more important here. Now this style has broken. Something has smashed the dream.

This giant burst of volatility tells us that there is huge uncertainty in the market.

So ask yourself what that involves?

It involves a change of investment environment and the participants in the market fighting that change.

“Buy the dip” is the brain dead mantra that has harvested lots of profits through the era of QE ever-inflating stock prices. What if that stops working? The crowd ‘buys the dips’ but the negative environments rains on that parade and the market begins to shake as the two conflicting forces meet.

Who do you put your money on? The crowd or a new market reality?

I bet against the crowd every time; you cannot fight market systemics.

So what is this new reality? What is causing this? The pundits are unclear, spouting all sorts of waffle that would have been true last year but weren’t and must somehow now be the reason.
Amazingly, few can see the obvious. Where are the headlines?

QE made equities go up. Does anyone disagree?

‘Reverse QE’ is making it go down. Reverse QE is where the Federal Reserve starts to sell its bond mountain for cash. It pushes up interest rates, it sucks money from the economy and straight out of the markets.

Is that ringing any bells?

Reverse QE started in September and month by month is ratcheting up. By next September it will hit $50 billion a month from the starting point in September of $10 billion.

The market is crashing because reverse QE is biting and it is going to bite harder.

There is trillions of dollars of reverse QE to come. Years of it.

Now I suppose it is hoped that U.S. fiscal loosening, tax cuts and overseas profitability repatriation will counterbalance this huge liquidity hit, but for sure this new cash will not flood straight into equities. I’m sure a strong economy is meant to pump liquidity into the loop via profits too, but will these do anything but hold the stock market at a flat level for many a year?

However, this is ‘unorthodox monetary policy’ in reverse. Do you remember when QE was called ‘unorthodox?’ Well, we are back in unorthodox territory again and this is not the happy slope of the mountain of cash, this is the bad news bloody scrabble down the other side with trillions of less money all around.

Somehow this ‘unorthodox’ unwinding of liquidity is aiming for a smooth transition. Well, they are going to need good luck with that and it looks like the process is having a rough start.

So reverse QE could stop. The Fed could halt the program. However, it seems unlikely they would pull the plug on the whole program that fast and then what? First they’d have to take the blame for crashing the market, then they would have to tacitly admit they are stuck with mountains of debt that they will have to roll forever.

That means reverse QE is going to have to punch a far bigger hole in the market than we have seen before it hits the headlines. So where is that? 20,000 on the Dow, 18,000?

Well that’s my feeling, which is why I am cashed up.

So take a look at the chart and remember that reverse QE is here and until further notice the Fed is shrinking its balance sheet, which means one thing… The market is going down.

All of a sudden knowing which way the market is going doesn’t seem so asinine.

History says the bull market is ending

My Comments: Paranoia is an elusive thing. Just because you’re paranoid, it doesn’t mean there’s no one out there intent on putting you down. It’s much the same with the stock market. Just because we’ve not had a market correction now for almost nine years, it doesn’t mean there is one just around the corner. Or does it?

I’m writing this in an attempt to justify my position that for the past three years, I’ve been warning clients and whomever will listen that a market correction of significance is ‘just around the corner’. Is it paranoia or is it real?

Personally, I hope it happens soon. That way we can get over it and move on for the next several years. I just want to be able to start the next upturn from a higher point than the depths of the next collapse. How about you?

If you want a way to participate in the inevitable upside and avoid the inevitable downside, reply to this post or send me an email. I have an answer for you.

(This comes from http://stansburychurchouse.com)

If history is any guide, the good times are about to end for the U.S. stock market.

It’s been one of the longest-running bull markets ever…

Over nearly nine years, or 105 months, the S&P 500 has returned 368 percent (including dividends).

That’s the second-longest bull market the U.S. has ever seen… just behind the nearly 9.5 year-long, or 113 months, bull market that started in 1990.

You can see the S&P 500’s past bull markets in the table below… it shows the date they began, their overall return and how long each lasted. On average since 1926, bull markets have lasted for 54 months, and resulted in returns of 160 percent.

After the 2008/2009 global financial crisis, interest rates around the world plummeted. In the U.S., the Federal Reserve cut interest rates from over 5 percent to zero in the course of just over a year.

Coupled with that, we saw an unprecedented surge of money printing as the Fed expanded its balance sheet (by creating money and buying assets) from a little over US$800 billion to over US$4.4 trillion today, along with a wholesale bailout of the banking system.

We also later have seen a “Trump rally” where investors expected President Donald Trump’s tax reform and infrastructure investment election promises to boost the economy.

But the gains can’t go on forever

Take a look at the following chart. It shows when and why each of the bull markets above eventually ended.

For example, in 1990, the U.S. market entered its longest-running bull market on the back of the Internet boom. The S&P 500 soared over 400 percent in nine years. But in March 2000, the market peaked – and went on to fall 49 percent over the next 2.5 years.

In 2002, the market soared back. It went up over 100 percent in five years. Then the global financial crisis hit in 2007, and the S&P 500 fell 57 percent over the next 17 months.

The bull market/bear market cycle keeps repeating… thanks to mean reversion. Markets (along with most other things in life) tend over time to reverse extreme movements and gravitate back to average.

It’s like a rubber band… stretch it and when you let go it returns to its original shape. So after a period of rising prices, securities tend to deliver average or poor returns. Likewise, market prices that decline too far, too fast, tend to rebound. That is mean reversion, and it works over short and long periods.

And mean reversion isn’t the only reason we think the U.S. bull market is winding down…

Overpriced equities

By many measures, U.S. stock market valuations are high.

One of the best ways of measuring market value is to use the cyclically-adjustedprice-to-earnings (CAPE) ratio. It’s a longer-term, inflation-adjusted measure that smooths out short-term earnings and cycle volatilities to give a more comprehensive, and accurate, measure of market value.

As the chart below shows, the CAPE for the S&P 500 is now at 33.6 times earnings. That’s higher than any time in history, except for the late ‘90s dotcom bubble. It’s even higher than the stock market bubble of the late 1920s.

High valuations don’t mean that share prices will fall. High valuation levels can always go higher, at least for a bit. Or they could stand still for a while. But mean reversion suggests that at some point, valuations will fall, one way or the other.

And as we showed you recently, the U.S. economy could also be about to see a slowdown in growth – which could also dampen market sentiment and hurt share prices.

It’s not just the U.S.

Now, this is all in the U.S. But we’re seeing a similar situation in global markets.

As we told you in November, the MSCI All Country World Index (which reflects the performance of global stock markets) has seen an unprecedented streak of gains over the past year. And it’s up 8.4 percent since we last wrote about it. As we said earlier, nothing goes up forever.

Plus, if the world’s biggest market (at around half of the global market cap) is in trouble, the rest of the world could be too.

So what should you do?

Look to diversify your portfolio. Regular readers will know that we’re big fans of diversification.

We’ve written before about the importance of not just investing in different sectors and asset classes… but in different markets and countries too. That’s because spreading a portfolio around the world reduces risk. After all, gains in one market can offset losses in another.

And while the gains in some markets are nearing an end, they’re just getting started in markets like India, Bangladesh and Vietnam. These are three of the fastest-growing markets in the world.
So do yourself a favour and diversify your portfolio.

Read the original article on Stansberry Churchouse Research. This is a guest post by Stansberry Churchouse Research, an independent investment research company based in Singapore and Hong Kong that delivers investment insight on Asia and around the world. Click here to sign up to receive the Asia Wealth Investment Daily in your inbox every day, for free. Copyright 2018. Follow Stansberry Churchouse Research on Twitter.