Do you notice the Yield Curve narrowing?
As I’ve explained in my book, “Dow to Drop 80% Soon?” one of the best predictors of a recession is a negative yield curve. The yield curve is inverted when long term yields are lower than short term yields. The yield curve inverted just prior to every U.S. recession in the past 50 years.
As of June 15, 2017, the yields between the 10-year and 30-year treasuries have been narrowing, i.e. 10-year is now 2.16% and 30-year is now only 2.78%. See the government website below:
When the yield becomes negative or inverted, market sentiment suggests that the long-term outlook is poor and the yields offered by long-term fixed income will continue to fall. It also spells trouble for the financial sector as what started happening in late 2006. The incentive for depositors to leave their money with the bank for longer periods of time, say 5 to 10 years is to earn a higher interest rate. If the interest rate of return is the same or less for 5 years compared to 1 year, this incentive is gone. This means that profit margins fall for companies that borrow cash at short-term rates and lend at long-term rates, such as hedge funds, banks and mortgage companies. Equity lines of credit and adjustable rate mortgages (ARMs) which are periodically adjusted usually go up since they are based on short-term interest rates. Debtors who got stuck with these loans will need more money to pay for additional interest. They will need to tighten their belts since they will have less money to spend on consumer goods that is why recessions follow an inverted yield curve.
Although we are at record high territories in the stock market, with the Dow trying to breach the new resistance level of 21,700, we live in dangerous times. I see the Dow can quickly lose 3,000 in just a period of 10 to 20 days. The reason for this stock market high is the pro-business stance of this administration even though not very much has come to fruition yet, i.e. the talk about curtailing burdensome regulations, lowering corporate, capital gains and repatriation taxes and increasing the defense and infrastructure budgets. Investors are optimistic that Trump’s government technocrats will continue to develop policies that will increase our GDP which should keep recession farther away in the horizon.
May 17, 2017 – We are in correction territory! As I have written on my March 24, 2017 blog, stocks are poised to lose 10% to 30% in this correction mode. It may take a while but a dysfunctional White House and the strange behavior of Pres. Trump will hasten the correction. Here is the pattern I see: The Dow may lose 300 pts. today, may gain 200 pts. tomorrow, may lose 300 pts. the day after, gain 200 pts. after that and so on. The Dow may not drop by 2,000 points in one day but it’s coming. As you have seen the behavior of the market, after the Dow initially breached resistance level of 21,000 it did not get back up there for a long period of time. Perhaps only briefly on certain days. What should we do? We have to watch the market carefully. The economy, business and Wall Street are so intricately related that cause and effect are oftentimes hard to define. When investors pull their money out of stocks, where will the money go? When will investors go back to stocks? Will the current gloom and doom news in politics and world events affect consumer spending? The last question is really the most important one because an interruption in consumer spending = recession. And guess what folks? Stocks may drop 60% during the bear market that follows a recession. There is no big problem if you stay in stocks and bonds during periods of corrections since the market should recover relatively quickly. But it will be a total misery for you if you lose 60% of your retirement savings. The stock market will crash, but when? Read the eBook, DOW TO DROP 80% SOON?
You will find out when to get out of equities before the next recession and when to get back into stocks before the start of the bull market that follows a recession.
5-10% Stock Market Correction
March 24, 2017 – Folks, the long awaited stock market correction is here at last. We can expect a 5 to 10% decline from the Dow’s most recent high of 21,000. As we’ve mentioned before, any bad new can trigger the correction. It appears that the most recent not so good news that are making investors and the smart money edgy is the realization that not all Trump’s investor friendly proposals will sail smoothly through congress. TrumpCare which is supposed to be the replacement for ObamaCare was thrown out due to lack of support. This the first indication Trump’s that investor-friendly promises such as reduction of corporate and personal taxes may not see the light of day. The good news though, is that this consumer driven economy is still going strong. Transportation sector is stronger than ever which is an indication that a recession is not looming in the horizon yet. The bad news is that stock prices are really over priced that is why a correction is expected. For the average investor like you and me, we will be better off leaving your money alone until the next recession which will surely come. When will that happen, download my eBook, DOW to drop 80% Soon?
The Dow is really trying to surge through the resistance level of 20,000. It may do it this week or there may be a 5-20% correction before breaking through that resistance level. Many stock market experts have turned bearish pointing to the longevity of this bull market, overvalued stocks, Trump’s tweeting habits and what many political pundits consider as dangerous casual comments about serious global problems such as US, Russian relations and North Korea’s threat to continue to develop nuclear weapons capable of reaching parts of the USA. Trump’s reply in a tweet, “it won’t happen”, is considered by many as proof of Trump’s lack of experience in dealing with global matters. Many investors are poised to bail out of stocks before inauguration day. Many stock market experts and some respected economists are even predicting a recession this year. Most investors will stay and weather the bumpy ride through the first 100 days of Trump’s presidency. There will be wild fluctuations but I predict there WILL NOT be a recession in 2017. Be reminded that in general, stocks will lose 30% to 60% of their value during the bear market that follows a recession. When will it happen? When should you get out of the stock market? Read my exit strategy in, “DidoSphere LIVING RICH AND LOVING IT”.
Correction before Dow 20,000?
Just like I said in my previous post, we may experience a 5-10% correction before breaking through the resistance level of Dow 20,000. It has been 2 weeks now that the Dow has been hovering around the resistance level of Dow 20,000 but has not closed above that. We may be in dangerous waters although in the long run I still feel bullish about stocks. Read my book “Living Rich and Loving It”, to find out when you should really get out of stocks and put your money into a money market fund. Merry Christmas, happy holidays and a prosperous New Year!!!
After Dow 19,500 resistance level was breach on Wednesday, Dec 7, we are looking for a new resistance level of 20,000. A serious correction of 5-10% may happen before reaching Dow 20,000. There will be profit taking and the gnomes of Wall Street are just waiting for a slight whiff of any bad news to dump some stocks and get back in after the correction. For now, those who stayed with me and did not panic and did not get out of the market before election day, let’s open some bottles of champagne this weekend, congratulate ourselves and enjoy this Trump rally. Just remember our long term outlook. If Trump’s proposal for lower taxes sails through the Republican Congress and Senate, we will have a lot of foreign earnings coming back into our economy. A lot of it will find its way into the stock market. Let us check back if/when the Dow breaks past our new resistance level of 20,000. Have a great weekend!
November 22, 2016
As of today’s closing, all the U.S. stock market major indices reached record highs. The Dow closed above the resistance level of 19,000. In the short run, the stock market will not have a “stairway to heaven” type of climb. I guarantee there will be dips at the slightest whiff of any bad news. Remember the first quarter of this year when the price of crude dipped below $35 per barrel? Moreover, there will be profit taking by the Gnomes of Wall Street.
The new resistance level we are looking for on the Dow is 19,500. There may be a 10% correction before reaching this resistance level. The climate has suddenly changed with the election of Trump. The Gnomes of Wall Street, or perhaps we should call them the shepherds leading the flock suddenly decided that a Trump presidency is good for the economy. Does anyone even remember that the Dow futures were 800 points down on election night as Trump started winning the battleground states one by one? What was that all about? Even though the market opened higher on the day after Election Day, my friend Jake got out of the market as soon as it opened at 9:30, Wednesday morning and put his entire portfolio into a money market fund. He voted for Hillary and was afraid that Trump’s victory would precipitate a global equity sell-off because he believed that Trump is an unpredictable, unstable and unqualified leader who’s the laughing stock of the whole world. Even after the Dow gained 1,000 points, my friend Jake is still out of the stock market. He told me last night he “cannot believe why the market keeps going up”. Don’t mix investing with politics, folks. Happy thanksgiving!!
It has only been over a week since the voters elected Trump and housing starts are up, unemployment claims have been the lowest since the great recession, retail sales look strong, corporate profits are up, the Dow gained more than 5% since the election. Happy days are here again? We’ll see. The uncertainty of the US elections kept the stock market stagnant for almost a year. So this is a post-election bump that still has legs. Trump’s pro-business policies of curtailing government regulations, lowering corporate, capital gains and foreign earnings taxes are meeting with great enthusiasm from the gnomes of Wall Street. Look for a correction around Dow 19,500. The correction could be 5-10%. Follow this blog so we may discuss the possibilities.
Wednesday morning after Election 2016, the 1,000 point drop in the Dow that many so-called experts predicted as they were watching Trump beat Clinton one battle ground state after another did not happen after all. In fact stocks are not only in the positive territory at noontime eastern standard time but had healthy gains of 1-1.5%. Still Myles Udland, a financial writer for Yahoo Finance says, “…don’t mistake Wednesday’s rally for an “all clear” sign from markets. The unknowns around any new presidency are considerable, and perhaps no recent administration presents more question marks for investors than a Trump White House”. Adam Parker, a strategist at Morgan Stanley, wrote in a note to clients on Wednesday that, “We are more bearish today than we were yesterday because of increased uncertainty.”
Frankly, I am tired of listening to these geniuses and shame to investors who blindly listen to them. These are the same type of geniuses who led investors on the wrong path in 2008. After investors lost 50% of their savings during the bear market that followed the great recession, these geniuses told them to get out of stocks.
Go ahead, listen to Udland and Parker. Get out of the stock market now and you’ll be sorry. I say this because Trump’s fiscal policy is pro-growth. Low taxes, less government regulations, repatriation of foreign profits, possible repeal of Obamacare, infrastructure investments, etc. Of course I am concerned about a few uncertainties such as Trump’s promise to replace Janet Yellen whom I think is doing a great job and protectionism but I don’t think Trump would act recklessly with regard to these two concerns. He has VP Pence and other technocrats to hold his hands. So when will the stock market crash? We will exchange thoughts and ideas. Follow this blog and learn.