5 Most Dangerous Signals For The Bull Market
As readers know, I am a super bull when it comes to the stock market. However, I am not so naïve as to believe that the current bull market will last forever. It will end, and judging from the massive explosion in stock prices, the plunge may be the worst of our lifetimes.
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One of the most critical investment skills is the ability to see both sides of every situation.
It is so easy to be blinded by bias when holding an investment.
#-ad_banner-#The best investors remove themselves from their ingrained biases when making decisions. This skill is what separates the world’s top stock market players from the massive number of average market players.
This article is the result of my viewing the market from the dark side. It was deep within the bear’s caves that I dredged up these five unusual signals of an impending stock market plunge.
1. Labor At Capacity
The Federal Reserve’s Beige Book made it very clear that the U.S. economy has hit labor capacity. In other words, it is becoming harder and harder for employers to find skilled workers. As the labor market supply drops and demand increases, growth becomes stymied, potentially leading to an overall economic slowdown.
Several examples of the labor constraints across the Fed districts include everything from truck drivers and restaurant workers to engineers, IT, and other highly skilled workers.
The Dallas Fed reported, “Labor market tightness continued across a wide array of industries and skill sets, with several contacts saying difficulty finding workers was constraining growth to some extent. Oilfield services firms noted shortages of mechanics and truck drivers, and one contact said hiring and retaining workers in the bottom 20 percent of their payroll was a challenge. Wage pressures remained elevated, and firms expected to give employees a larger increase in wages this year compared with 2017. Several firms were employing multiple strategies to recruit and retain employees, such as intensifying recruiting, raising wages, offering on-the-job training and increasing variable pay/bonus.”
Indicating that the issue is nationwide, the Boston district on the East Coast noted, “Manufacturing contacts said the labor market was tight, but the exceptional difficulties were mostly in highly skilled areas like engineering … Higher freight costs continued to be an issue across a wide array of industries, with the shortage of commercial truck drivers being cited as an important factor. Several manufacturing contacts said that they were only able to pass through a portion of the higher costs to customers. As a result, margins were declining.”
When the labor shortage is combined with the current tightening of immigration is painted a potentially bearish picture for the future.
2. Spiking Interest Rates
Although the Federal Reserve has stated multiple times that it will only raise interest rates gradually, several scenarios can quickly lead to spiking rates and the subsequent market plunge.
First, faster growth than expected may quickly force the Fed’s hand to spike rates as a countermeasure. The rapid growth could come from tax reform, fiscal stimulus, or even a strong economy. A combination of these three factors would be the most likely scenario to result in the Fed abandoning its rate raise plan.
Secondly, an inflation increase beyond the expected may result in the Fed spiking rates to contain the runaway inflation. This is not as farfetched as one might believe. Wage data released in February suggested upside inflation pressure is quickly building.
3. Maxed Out Valuations
The S&P 500 is overvalued relative to earnings. According to the New York Times, $100 invested in the S&P 500 only generates around $4.78 in earnings. That is a minuscule return when compared to the inherent stock market risk.
4. Merger and IPO Activity
This year is set to host the highest number of mergers and IPO since 2007. Companies search for mergers to help spur growth and IPOs are hot when stock market valuation soars. History has shown that merger and IPO activity tends to spike at stock market tops.
5. Yield Curve Inversion
There is a substantial potential of the yield curve inverting in 2018. The yield curve represents the spread between long-term and short-term debt securities. When it inverts, it may be signaling an imminent recession. Economists are forecasted the yield curve to invert near the end of 2018 should the Fed continue with its planned interest rate hikes.
Reuters reported that James Bullard of the St. Louis Fed stated, “Imminent yield curve inversion in the U.S. has become a real possibility. Yield curve inversion is a naturally bearish signal for the economy. This deserves market and policymaker attention.”
Risks To Consider: The famous saying that markets can remain irrational longer than you can stay solvent is authentic in times like these. No matter how bearish or bullish things may appear, the stock market can quickly do the opposite in the long term. Always use stops and position size wisely when investing.
Action To Take: Keep a close eye on the above five bear market signals!
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