Are Stocks Setting Up For Another Negative Market Event?

Recently, I opened up the research I normally provide my clients to a wider audience. (You can view it here). The response was amazing and the feedback from investors around the country indicates that they are not ready to buy the story that everything is great and now is the time to buy stocks.

In fact, the market downturn last August and again in January seems to be more indicative of the environment we are in. Slowing growth and a volatile market.

The Wall Street System gets paid to keep people invested in things like mutual funds that continue to generate fees for them even when the investor loses money. If that investor decides to move their money out of that mutual fund and into cash (where it won’t go down), the Wall Street stops getting their fee. Maybe that’s why the Wall Street firms don’t recommend you move to safety when it is becoming abundantly clear that economic growth is slowing both here in the US and around the world.

Since stocks tend to do well when the economy is growing it makes sense that most growth-oriented stocks won’t do as well when an economy goes from good to less-good. And this is what we are facing with this market downturn.

That’s why I generally moved my clients out of stocks around the second or third quarter of 2015. As I explained in my market commentary a month or so ago, the key to making money in stocks is to buy low and sell high. The highs in the US stock market indexes occurred around last July. I believe that the data indicates that the probability is rising that there will be another significant negative market event… perhaps even like what we saw in 2000-2003 or 2008.

In order for me to be able to get my money (or my clients) into the market when it is ‘low’ first requires that I get them out at or near the ‘highs’. Unfortunately, the Wall Street System’s brokers are not trained in managing money, just in gathering assets; so they think you should remain fully invested all the time.

Below is a chart from Jeff Kleintop of Charles Schwab. This is a great graphic and can likely be used in different ways. My reading of the chart is that it helps frame this argument of whether there is a lot more growth ahead (mid cycle) in the US market versus the idea that the economy is slowing (late cycle). The US stock market has gone over 7 years without a Bear market correction which is defined as a 20% pullback. On the other hand, emerging international stocks had a 20% correction toward the end of 2015. So did developed international (non-US) stocks.



I believe we are seeing evidence of emerging market economies slowing. Further, we are seeing evidence of non-US developed economies slowing… along with evidence that sales and profits in the US have been declining the last 2 quarters. With 494 of the 500 S&P 500 companies having reported, sales growth is down 4% and earnings (profits) growth is down 7.5%.

The underlying problem worldwide is a lack of economic growth. The policies of the Central Bankers around the world have failed to spur growth as evidenced in Japan, China, Europe, Canada and the U.S. I could have named many more countries but you get the idea. I will generally avoid significant exposure to growth-oriented stocks until a way is found to spur economic growth; until we actually see sustainable growth showing up in the economic data.

stock market newsPersonally, I don’t believe that monetary policy (things like changing interest rates) alone will create an environment that will encourage growth. I believe that there will have to be legislative actions such as reducing regulatory burdens, reducing taxes and allowing for foreign corporate funds to be repatriated to the U.S. Americans are entrepreneurial by nature—let’s unleash them. And that will depend on what happens in the elections. It will depend on what the politicians do after the elections… (sigh).

Meanwhile, there are ways to invest that can preserve your wealth even in the midst of a market downturn. We need to avoid those types of investments that are based on growth and favor those that do well during an economic downturn. For example, US Treasury bonds do well as an economy slows whereas high-yield or junk bonds don’t.

On the stocks side, there are times when it can pay to be short certain sectors of the stock market (like financials) so that you make money when those sectors go down. I believe you can short small and/or mid-sized stocks and/or their indexes.  But it is all about managing risk and keeping sizes small and manageable.

Consumer staples are defensive and tend to outperform in a market downturn. For instance, utility companies as a sector are up on the year while financials are still down. These are just examples, but I believe it is wise to lean a portfolio more towards that  of a market downturn. Thanks for reading.


Twitter:  @JeffVoudrie

The author holds positions U.S. Treasuries securities at the time of publication. Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.


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