Investors in stocks have done well in 2017. But all investors must prepare for when the party comes to an end.
March 2017 marks the eighth anniversary of the second longest bull market in history.
The Dow began the month by breaking through 21,000, just 24 trading days after breaking 20,000. Sameer Samana, global quantitative strategist at Wells Fargo Investment Institute, says that all the recent publicity about new stock market highs is driving a feedback loop of feverish participation in the markets, especially by unfortunate retail investors who historically always rush in just as a market is peaking.
Risks to the stock market are real and growing. As of March 3, 2017, the S&P 500 P/E Ratio was roughly 26.75, much higher than the historical mean of 15.64. With hyperfast market inflation and extreme S&P P/E Ratio levels, we are clearly at a turning point seen just before previous market crashes in 2008 and 1987.
Brown Brothers Harriman chief currency strategist Marc Chandler thinks the greatest uncertainty around the stock market is the ever-wavering policies of the Federal Reserve.
One area of growing concern is the housing market: signals suggest that a housing bubble burst in 2017 is likely. An excessive expansion of money supply, coupled with historically low interest rates has led to the current real estate bubble. If rates rise, as the Federal Reserve has signaled it is planning to do, the end of cheap mortgages could dampen speculative real estate investments and push many homeowners over the brink, just as what occurred in the housing bubble of 2008.
The combination of stagnant wages, over-inflated home prices and higher mortgage rates make a housing crisis inevitable.
Proposed Fiscal Stimulus May Be Too Strong
President Trump’s proposed tax cuts, deregulation and federal spending on defense and infrastructure have helped fuel the stock market’s historic climb, but concerns are mounting that the medicine the president is offering may be too strong for a U.S. economy in its eighth year of growth.
Wages have finally begun to rise and the jobless rate is falling. However, a recent Reuters analysis suggested that the President’s stimulus could create too-strong demand for workers in areas with tight labor markets, cause inflation to rise, force the Fed to raise rates and drive us into recession. Economic challenges such as the decline of the nation’s coal belt or a shrinking middle class in depressed regions are extremely hard to fix regardless of who is in the White House.
According to the U.S. Treasury Department, major infrastructure needs are clustered around big coastal urban centers, and any big projects could make regional disparities even greater. Cornerstone Macro analyst and former Fed economist Roberto Perli warns that with the labor market already tight, the Fed will likely view demand-side fiscal policies as inflationary and would tighten monetary policy faster than markets expect.
Gold: Your Hedge Against Market Corrections and Federal Reserve Experiments
Many investors don’t know that gold often experiences a “bounce” after a rate hike happens. One year ago, gold prices rose after the Fed delivered a 25-basis point hike. Markets were preparing for the worst scenario and the Fed’s action removed rate-related uncertainty in the gold market.
As uncertainty rises and the stock market runs out of steam, physical gold will benefit from the “flight to safety,” just as it has for centuries. It is a safe-haven asset that could provide considerable diversification protection for your portfolio if the markets experience a severe correction.
Gold is a critical component of any sound investment strategy and offers a level of diversification and control no paper asset can deliver.
Prepare Today for Tomorrow’s Crash
Stocks are trading at nosebleed levels, interest rates are on the rise and signs of a housing bubble abound. This is a perfect time to own physical gold and silver as the insurance policy you need to weather the coming turbulence. In fact, short-term dips in gold and silver prices are actually the best time to buy a safe-haven asset at discounted prices.
Higher stock prices can lull the average investor into a false sense of security while genuine market risks are downplayed or ignored all together. As retail investors rush pell-mell into overpriced stocks, this is the time to plan for the worst-case scenario and invest in physical gold and silver.
