In a period of expansion, a 10% stock market correction every 12 months and a 20% correction every 12 to 18 months is normal, historically speaking. We have seen the Dow drop over 1000 points since last week and maybe the major indices will continue to drop to a support level of close to 20% devaluation since the most recent high. Don’t panic. Don’t take all your money out of stocks after they have lost 20%. Someone will make money on your losses. “The Gnomes of Wall Street” are just waiting on the sidelines. As soon as they determine they can make enough profit on their money, they will bring that money in from foreign accounts especially now that corporate taxes have come down from a high of 39% to 21%. There are corporate billions of dollars in Europe and Asia looking for a home…and that home without a doubt is Wall Street. Now that the stock prices have fallen, watch how fast they will recover again and soar to new highs. There is really no fundamental economic reason for this sudden drop in stock prices other than they increased so quickly that a slight correction is inevitable. Even if the Feds increase interest rates by 100 basis points next year, that will not be enough to cause a recession. Other aspects of the economy are still fundamentally sound. Read my book kindle ebook, DidoSphere’s The Simplest Path to Wealth available on Amazon Kindle to learn how to time the market so you may get out of stocks before the bear market that follows a recession.
didosphere investing time & yield the two main ingredients in an investment recipe
‘DidoSphere’s Simplest Path Wealth’ – Time Yield – At age 30, most of us know very little about money. Even those who graduated with a finance or accounting degree will encounter difficulties in putting the theories they learned in college into practice when they get to the real world. If I knew then what I know now, I could have retired at 55 and could have been spending my days on my yacht fishing in the Bahamas and drinking fine wine in the evenings. The problem when we are young is that we are too skeptical to listen to good advice due to many years of indoctrination. We have been listening too long to quips such as, “If something sounds too good to be true, it probably is”.
The decade of the eighties was a period when I tuned out to music-radio and tuned in to talk-radio. I took in a lot of talk radio, close to 12 hours a day. I know very little about 80s music but I learned a lot about politics, sports, sex and money from radio personalities who flaunted their knowledge in their respective areas of expertise. I kept a small radio next to my early version PC (personal computer) and listened all day long, non-stop to various talk show programs, switching back and forth to NYC stations, WABC, WNBC, WOR and WMCA while laboriously tinkering with budgets, forecasts and analyses on Lotus 123. I slept with the radio on much to my wife’s chagrin, albeit I was using headphones. I listened to political discussions, travel, sex, sports, real estate and finance. Most of the programs were “call in” shows meaning listeners called in to voice their opinions, challenge the host or ask for advice. Although I was amused with Dr. Joy Browne’s sex advice and Bob Grant’s ultra-conservative antics, the ones I enjoyed the most and found most useful were the financial advice shows of Bruce Williams, Bob Brinker and Bernard Meltzer. Come to think of it, I never called into any of those shows, but many of the callers’ problems mirrored my own, so I implemented many of the solutions the hosts propounded. I learned a lot from those shows but one of my biggest regrets in life is not listening to Bruce Williams’ advice.
On one of his shows in the early eighties, right after his usual, “Welcome my friends, welcome to my world” intro, Bruce Williams went right into the news of the day. I can remember as if it were yesterday, he said, “In today’s financial news, you can now buy a non-callable 30 year T-bond (30 year treasury bond) with a guaranteed interest rate of 14.5%. Imagine my friends, if you invest your $50,000 today you will have $2.5 million in 30 years. You don’t have to invest in anything else. You don’t have to buy gold, real estate or do anything fancy.” I did not follow the advice, not because I did not have the cash (in fact my wife and I had close to $100,000 in the bank by then) but because, 1) 30 years is such a long time and retirement at that age was the furthest thing from my mind, 2) the advice simply sounded too good to be true. It sounded so incredible in its simplicity, it cannot possibly work, so I thought. There must be a catch somewhere. So I cast it off as satire or hyperbole from a talk show host always on the look-out for ratings. How wrong I was!!! Imagine my friends, had I followed this sound advice from a talk show host, with little risk, my $100,000 would have grown to $5 million in 30 years. I could have retired in my fifties, in pursuit of Marlin on my own 40-foot fishing boat off Cabo San Lucas. Instead, I squandered a big chunk of my money pursuing riskier, more exotic investments (See Chapter, “Isn’t There a Better Investment Strategy?). Today you will find me still tinkering with budgets, forecasts and analyses, albeit on excel which is faster than Lotus 123, so I have a little extra time to write books that I hope will someday become best sellers. Read more: DidoSphere’s THE SIMPLEST PATH TO WEALTH, an Amazon Kindle Book. https://www.amazon.com/Simplest-Path-Wealth-Turn-Million-ebook/dp/B01KPQB0OS/ref=sr_1_6?s=digital-text&ie=UTF8&qid=1509563427&sr=1-6&keywords=didosphere
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?
Folks, even though the Dow breached the resistance level of 20,000 a couple of weeks ago, I smell a 5% to 15% stock market correction knocking on our doors. In fact it is overdue. The last correction happened over a year ago. It was triggered by relatively benign news, i.e. there was an oil glut and the price per barrel dropped to below $30 in January 2016. The regular Jos Schmo would ask, “Why was that bad?”
Economists and political pundits think that the reason for the record surge in stocks is due to Pres. Trump’s pro business posture, i.e. lower taxes and less regulations. Doing away with burdensome regulations should be relatively easy to do. The administration does not even have to issue executive orders. The government can just stop enforcement. Lowering taxes is harder to accomplish. We are looking for the correction to happen around April or May.
Trump goes to war with the mainstream media but the stock market keeps going up. Genius or mad man? A presidency in disarray or a fine tuned machine? The smart money is betting that Trump is a genius and the administration is a fined tuned machine. Smart money keeps pouring into the stock market. Should you be a contrarian and bail out now that all the major indices have reached all time high? The answer is are you in for the long term or do you want to gamble a little bit. If you do, get out of the market now and put all your money in a money market fund (stable fund) because I think a correction is overdue. Wait until there is a major correction of 10 to 20%, then jump back in. Remember that if you are out of the market, you will die each day you hear the major indices reach record highs. If you adopt this strategy, sit back have a beer and watch TV until you hear the DOW is back down to 18,500. Then jump back in. Good luck. I’m not a gambler. I will stay put and ride the tide if my portfolio loses 10 to 20%.
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!!