The military is fond of saying, “Trust but verify“
I would like to believe this good news headline, but before I encourage my clients to put all of their nest eggs in the stock market and enjoy the roller coaster I must dig deeper. First, let’s consider the source. If I owned a large, well respected company that is in the business of underwriting stocks I might be inspired to argue that stocks are going to soar. Second, rather than get high on hope, and expect all trees to grow to the sky, however, it may make better sense to gauge the potential worst case scenarios. On the one hand I hope that Morgan Stanley and others are correct that central banks around the world will continue to underpin global economies by printing more money. Finally, on the other hand, we all know that all good things must come to an end. No one has any idea how that will turn out. I have no reason to believe that there is another player that might pick up where the US government left off buying $40 billion of US treasuries a month.
While the S&P 500, in my opinion, is the index to watch, t he ups and downs around 2000 has been like a roller coaster ride, with Janet Yellen at the controls. Many companies, like the banks, have benefited from the Fed’s easy money policies. At some point, and I have no idea when that will occur, every operator gets tired or the world situation changes so that pulling the levers comes to an abrupt stop. In the meantime there are two directions this could go. Should we see a convincing bounce of 3% or more above 2000 this market may have strong legs and show more upside. If we see more than a 3% drop, however, batten down the hatches and look out below. We may be in for another 50% or perhaps an 80% loss. The worst case scenario means the S&P 500 might fall to 400.
The S&P 500’s 50 day moving average now sits at 1962, so a retest of this level would be reasonable, according to HS Dent Research. The bulls and the bears are in tug of war looking for certainty.
Watch: ISIS, Geopolitics & Cycles
Every time you turn on the TV you hear more about the growing threat from Islamic State of Iraq and Syris (ISIS). They are well organized, well -funded, and outright brutal. As the world waits to exhale, after beheading two US journalists, President Obama made an emphatic statement; “That is to degrade and destroy ISIS.” The temperature is rising on the world’s Geopolitical cycle. It doesn’t look pretty. Yet for the most part, the stock market is largely ignoring these risks. As bubbles get bigger so does the bust that follows. It may be just a matter of time before there is a rude awakening. As we have covered here, there are global demographic trends just ahead that cannot be out-engineered and higher debt levels than was experienced during the world financial crisis in 2008. Many investors and institutions have not learned anything.
Cruising for a bruising
Just when we thought the world was safer than it was 20 years ago we wake up to the Russian invasions of Crimea and Ukraine. Cities in the US and the UK have suddenly become potential targets for terrorist attacks and we are shocked to learn that our own young people are being recruited right from Minneapolis. The best news may be that western allies and Arab states band together against this common enemy. Meantime, the stock market bubble continues to advance and the possibility of an avalanche grows as well. When you are at the beach building sand castles, you know you never really know when a few grains of sand cause the whole thing to come down in a crash.
Thanks to HS Dent Research we can identify 3 Key Macroeconomic Cycles to watch: the 39-year Generational Spending Wave, the 36-year Geopolitical Cycle, and the 45-year Innovation Cycle. As we study developed countries from 1898-2036 it appears that all 3 cycles are pointing down at this time.
“It’s true that hard work never killed anybody, but I figure why take the chance.” - Ronald Reagan
So let’s look at the situations with money on the table as if you are preparing to retire soon. You have $1M of assets outside your home and you are setting your withdrawal speed limit at 4% so the $40,000 annual income you believe will be sufficient with your Social Security and pension. In the most rosy scenario that the S&P 500 rises from 2000 today to 3000 in 5 years or so, your 100% equities will increase to $1.5M and if your 4% withdrawal rate stays the same you can increase your income by 50%, going from $40,000 to $60,000. We work with a lot of engineers and this group of non-Polly Anna’s who don’t like to be sold are trained to first look at the worst case scenario. If because of acts of nature or acts of man, the S&P 500 drops by 50%, now you only have $500,000 and your income may end before you do. Even more unlikely, but worthy of consideration, if the market crashes 80% your $1M nest egg is suddenly reduced to $200,000. In either case your income of $40,000 may stop in as little as 5 to as much as 12 years. Only you are still alive. A Gallup Poll just released states, “66% of Americans said their #1 financial concern was not having enough money for retirement.” You can’t just set it and forget it. We’ve got work to do.