Right now, we’re still in perhaps the greatest bull run in history.
The “weather” is terrific: low interest rates, an economy firing on all cylinders and a business-friendly administration in the White House. The Dow Jones Industrial Average recently hit 27,000 for the first time ever — and, despite some recent turbulence, remains near record highs.
But the longer this decade-plus bull market runs, the more investors worry about its end.
They’re right to worry. After all, every business cycle turns — and so will this one.
Economic recessions … real estate busts … stock market crashes … wars … financial shocks. These aren’t aberrations. In fact, they are common occurrences. A quick tour of American history shows how this is the case. During the 110 years from 1900 to 2010, we’ve had the Great Depression, two world wars, more than 30 bear markets (market drops of more than 20%), the runaway inflation of the 1970’s, the savings and loan crisis of the 1980’s, the 2000-’02 dot-com crash and the 2007-’08 financial crisis
I’m seeing signs that the next crash could hit soon.
That doesn’t mean you should panic and sell everything — just that you should be prepared by defending your wealth. After all, there are always ways to make money, even if the market tumbles.
So here are three warning signals I’m seeing that could cause problems for the market — and one step you can take today to make sure you’re prepared for the worst…
Market Crash Warning Signal No. 1: Deep in Debt
Let’s go back to 2007 … right before the last time the market crashed.
The economy had been humming along at a growth rate of 2% to 3% for the previous five years, which caused the S&P 500’s earnings to double from the recessionary lows of 2002. Thanks to these boom-time conditions, the national unemployment rate fell below 5%. Investors were loving it!
Share prices had more than doubled over the previous five years. But below the surface, trouble was brewing.
While the stock market was busy hitting new all-time highs, mortgage debt, credit card debt, student debt, corporate debt and government debt were also hitting new all-time highs. The U.S. economy was literally drowning in debt. The economy’s foundation was crumbling beneath our feet.
Then stock prices collapsed…
The S&P 500 fell from its October 2007 high of 1,576.09 to an “apocalyptic” low of 666 in March 2009. That was a collapse of 57.7%.
The economic and stock market conditions of today share some important traits with the 2007 version.
The U.S. economy has recovered nicely from the 2007-2008 crisis, producing a steady string of 2% to 3% growth. As a result, the unemployment rate is below 5% once again.
Plus, the current financial boom is even bigger than the 2002-2007 bull market. This time around, the S&P’s earnings have tripled, as the stock market has rocketed more than 400% from its recessionary lows of 2009.
But despite this prosperity, our economy looks shaky if you examine it up close. Mortgage debt is once again close to the nosebleed levels it hit in 2008. Credit card debt has jumped to a new all-time high of $870 billion. Student loan debt has skyrocketed to nearly $1.5 trillion. That’s triple what it was in 2007. And corporate debt outstanding is hitting new all-time records, just like it was in early 2008. The difference is that the current levels nearly 50% higher than they were then.
It’s easy to “explain away” the market downturns we’ve seen so far this year — in May and now in August — as just temporary bumps during our decade-long bull run.
But they could be the start of something much bigger…
Market Crash Warning Signal No. 2: The Recession Indicator
On the morning of Aug. 14, before the U.S. markets opened, we witnessed a rare but ominous event.
That’s when a closely watched yield curve inverted for the first time since late 2005. Translation: The 10-year Treasury bond yield dropped below the yield of the 2-year Treasury.
This yield curve is a fairly reliable recession indicator. In fact, all five yield curve inversions since 1978 have been followed by recessions. Last time this yield curve inverted was in December 2005, two years before the recession hit.
So, not surprisingly, investors and Wall Street’s supercomputers immediately started selling stocks and moving into bonds. As you and your portfolio likely recall, the Dow Jones Industrial Average plummeted 800 points that day — and the other market indices sunk around 3% as well.
Starting from our peak back in late July, the S&P 500 has now sold off around 5%.
Moreover, according to the New York Federal Reserve’s proprietary yield curve-based recession probability model, there’s a 27% chance we will face a recession in the next 12 months.
I know … 27% doesn’t sound like bad odds, but here’s the thing: The last time the probability of a recession reached that high was back in early 2007, not long before the Great Recession kicked off.
Plus, one well-regarded analyst — Jesse Colombo at Clarity Financial — says the Fed indicator’s modeling is skewed thanks to some top-level shenanigans back in the 1980’s.
He places the odds of a recession in the next year at 64%.
In other words, our top “recession indicator” is flashing red.
Market Crash Warning Signal No. 3: Another Kind of Recession
As I write this, a second-quarter earnings recession is just about a done deal.
With just about all of the S&P 500 components having reported, the year-over-year EPS growth estimate is negative 0.72%, according to FactSet.
If that negative earnings score holds out, it would follow a 0.21% decline in the first quarter. And an earnings recession is defined as two consecutive quarter of negative growth.
True, 0.72% and 0.21% declines don’t sound bad. But here’s the point…
We’re seeing no growth in corporate earnings.
At best, according to the earnings followers at FactSet, S&P 500 earnings will grow 1.5% this year. That’s far short the 6% growth the experts forecast at the start of 2019. In fact, FactSet says, we could see an earnings contraction.
The last earnings recession was during the second quarter of 2016.
The market fallout following that was small — just 4.1% between mid-August and early November 2016.
But things could get a lot worse this time.
Consider these three factors…
- More than one quarter of the world’s bonds are “paying” a negative These “grifter” bonds literally take a little bit of your money away from you every day.
- Geopolitically, the planet seems to be enjoying relative calm. but tensions are on the rise in Hong Kong, North Korea, Iran, and Syria.
- The ongoing U.S.-China trade war is taking a bite out of global growth… and threatens to consume it completely. “This type of scenario is among the reasons why we referred to 2019 as a delicate year for the global economy,” the International Monetary Fund recently warned.
Still, despite these widespread signs of distress in the real economy, stock valuations are high, just like they were in early 2008.
To be sure, the stock market could keep rising over the next few months — and even hit new all-time highs. But history shows the risk of a severe selloff is high.
The National Association for Business Economics recently surveyed nearly 300 business economists, and about 75% of them believe we’ll get a recession by the end of 2021.
More than half of them expect it’ll come by the end of 2020.
The One Step to Take Now
That said, investors shouldn’t panic — or even worry — about a market crash.
The market crash may take months or even years to get here, but it’s inevitable – and no effort on anyone’s part is going to stop it.
Instead of worrying, investors should make moves right now to defend their wealth – and make even more money along the way.
To help you do so, I’ve written the book on bear market preparation.
Part “diary” and part “owner’s manual,” Bear Market 2020: The Survival Blueprint takes you by the hand and walks you, step-by-step, through six simple tactics that will help you and your family survive, and even make money, during America’s next bear market.
Knowing about and using these bear market defense strategies could mean the difference between having an abundant retirement — or barely getting by in your old age.
In this report, I’ve shown you why a bear market — or worse, a market crash — is coming.
The clock is ticking.
Eric Fry is a 30-year international finance expert, former hedge fund manager, and InvestorPlace’s resident expert on global investment trends. He founded his own investment management firm and served as a partner several others. One of the few analysts who predicted the last big market crash, in 2007-’08, Eric showed his readers how to profit off of companies that eventually went bust. His readers could have walked away with gains like 1,415% on Countrywide Financial, 4,408% on Fannie Mae, and even 6,425% on Freddie Mac. With Fry’s Investment Report, Eric’s goal is to track the world’s biggest macroeconomic and geopolitical events – and help investors make big gains from those emerging opportunities. Click here to learn more.