Ever since the election, the so-called ‘Trump rally’ has been chugging ahead at full steam, with the Dow Jones Index reaching a peak of 21,116 on March 1 2017.
Since then however, it has been steadily falling and on 24 March it closed at 20,597, which is over 500 points lower than its peak. I think we can safely say that the stock market rally is officially over.
And the end of this rally could not have come at worst time, with the Fed having recently raised its interest rates again, and signaling further rate increases to come. The higher rates will increase the cost of adjustable rate mortgages, auto loans, credit cards, and home equity lines at a time when GDP growth rates are falling below expectations. This means that at a time when credit is more important to the economy than ever before, credit just got more expensive.
As if that wasn’t enough, with the recent death of the much hyped Obamacare replacement, the so-called ‘Trumpcare’ or ‘Obamacare Lite’, things are looking even bleaker for the stock market. Right before the death of the bill, one congressman even warned that if the bill goes down, the market could take a 1,000 point hit, similar to the ‘No’ vote on the Wall Street bailout in 2008 which caused the Dow to tumble by over 700 points.
One market analyst, Sven Henrich, known as the ‘Northman Trader’, did a very long term analysis of the S&P500 in combination with the CBOE Volatility Index (VIX). He believes that in the near term, the market could drop by as much as 5 to 10 percent. For reference, that’s a 1,000 to 2,000 point drop in the Dow. For those interested, he references how we are at a point where a trendline connects the markets 1987 slide, its 2003 lows, and the point right before the crash in 2009.
The VIX is also in another bottom, and it looks like it’s about time for it to spike up again.
Of course, this downturn was inevitable, as the stock market was largely inflated by financial engineering, which includes things such as share buybacks. Share buybacks mean that companies use funds to buy back their own shares instead of productive activities. This reduces the number of shares outstanding and results in higher Earnings per Share. But if we look at total net income we find that S&P500 earnings are roughly the same as they were back at the end of 2011!
Despite the stagnating net income, their Price-to-Sales ratio is significantly higher compared to 2011; more than 50% higher, in fact.
As we said, the stock market run had to end eventually; the only question is how much further will it continue to fall? And if not stocks, where can investors put their money? Even US government bonds, widely considered to be the ultimate ‘safe haven’ asset, have taken a beating recently; something that hasn’t really been reported in the news. Take a look at the 10-year and 2-year Treasury yields graph plus the 30-year Treasury Bond Price Index, which is down a staggering 14%.
And with the Federal Reserve planning to raise interest rates even further, it seems probable that bond prices will only fall further.
So in the current economic climate, with both bonds and stocks falling, what is the right move for an intelligent investor? Well, we can tell you that other intelligent investors are diversifying their portfolios into true safe haven assets, namely precious metals such as gold and silver. Remember, stocks and bonds can go to zero, but gold never will.
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