I’m not surprised by the market’s plunge of recent days.
In my article “Making Money When the Party Ends” in December, I noted record levels of bullishness among individual investors — while the big players grew cautious.
“The caution signs are starting to pile up. It’s not a bad idea to take some proverbial money off the table,” I wrote.
I hope you did. But what about now?
Well, I hate to say this, but — after a drop of more than 2,500 points on the Dow, most of them in the last four trading sessions — it’s a little late to turn into a newly minted super-bear on the market.
Is the drop a potentially “ominous sign” of a 2018 stock market crash for all the reasons my colleague Ted Bauman noted yesterday? Absolutely.
Could the market drop further in coming days? Sure.
But in nearly three decades as an investor and former market journalist, I’ve yet to see a raging bull market like the one we’ve experienced come to a “full stop” ending, and plunge permanently off the cliff in the age-old style of Wile E. Coyote.
A 2018 Stock Market Crash Red Flag?
- Back in March of 2000, the S&P 500 fell 11% in a matter of days as the dot-com boom came to an end. But it came within a hair’s breadth of setting a new all-time high just five months later.
- By July 2007, the S&P 500 was up 10% for the year. A steep sell-off gave back all those gains by August. Yet, by October, the index roared back to set another new all-time high.
So don’t think of the current action as saying: “Get out of the market now.” The odds say you’ll have a second, likely better chance to do that somewhere down the road before the market crashes.
Instead, think of it as an extended warning.
It’s a red flag about interest rates, market risks and the need to shift your portfolio toward value-laden investments that can withstand higher rates, or benefit from them — such as I have in the Total Wealth Insider portfolio.
Here’s why: For the past decade (really, for the past three decades), we’ve gotten used to the idea that rates only go in one direction — low, lower and lower still.
In that time, we’ve watched the cost of borrowing money (as measured by the benchmark 10-year Treasury note) fall from 15% in 1980 to an all-time low of 1.36% in July 2016.
But here’s the thing: In the last 18 months, those same borrowing costs have nearly doubled, to a recent 2.85% last week.
For stocks, that has huge implications.
For instance, right now, the average dividend yield of an S&P 500 stock is 1.85%. But that comes with the risk of loss of your investment (as we’ve all been reminded in the past week).
Or … you could have a riskless, guaranteed return of your money plus interest right now if you bought the 10-year Treasury note, with its yield of 2.85%.
That’s why rising interest rates are a big deal in 2018.
In order to have a decent return for the risk of owning stocks, we need to see a dividend yield on the S&P 500 that’s much higher.
It won’t happen overnight. This is going to be a long process of adjustment for the overall market. But there’s no better time than now to start reassessing the stocks, funds and exchange-traded funds (ETFs) that you own. Before a 2018 stock market crash, you can gradually shift your investments where there’s better value and bigger dividend yields.
Jeff L. Yastine
Editor, Total Wealth Insider