Market Chaos Could Be Your Last Warning

I’m not surprised by the market’s plunge of recent days.

I’ve noted record levels of bullishness among individual investors before – 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? 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.

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.

Source by Jeff L. Yastine