Ten Years Post-Lehman Brothers Bankruptcy

Florence could influence data for months to come

Last week, the East Coast prepared for Hurricane Florence, which roared through the Carolinas and Georgia. As investors kept their eyes on the weather and its potential for destruction, estimates emerged of up to $27 billion in hurricane damage. This potential for damage contributed to insurance companies in the S&P 500 declining last week.[i] While the hurricane likely won’t have a large effect on our economy, its destruction could influence data for months to come.

Meanwhile, last week brought another milestone in our economy: the 10th anniversary of Lehman Brothers’ bankruptcy. For 158 years, the Wall Street firm weathered the markets’ changes. By 2008, however, various challenges, including excessive risk taking, led to its demise. The firm’s unexpected bankruptcy announcement shocked investors and triggered market panic, leading what was a simmering financial crisis to become the Great Recession. A decade later, the markets are on more solid ground, and banks hold more capital and have stronger regulation. While some professionals or analysts warn of a potential looming recession, current market performance and economic data indicate just how far we’ve come.

Let’s examine last week’s data to understand examples of where we are today: Domestic indexes rebounded to post healthy gains for the week, with the S&P 500 adding 1.16%, the Dow gaining 0.92%, and the NASDAQ increasing 1.36%.[i] International stocks in the MSCI EAFE were also up, gaining 1.76%.

In addition, we received the following updates, which support a picture of a more robust economy:

  • Consumer sentiment jumped: The September reading was at its 2nd-highest point since 2004. The data reveals that consumers expect the economy to grow and create more jobs.[i]
  • Retail sales stalled but are primed for growth: Spending barely increased in August, after months of strong growth. However, analysts believe this data is “a blip” rather than an emerging trend, as tax cuts and a healthy labor market leave Americans with money in their pockets.[ii]
  • Industrial production rose for the 3rd-straight month: Auto manufacturing contributed to higher than expected industrial production in August. For now, trade tensions have not yet hurt this sector.[iii] 

These data reports may not show blockbuster growth, but together they indicate our economy is doing well. In fact, they were strong enough to lead many economists and analysts to increase their projections of how fast the economy expanded during the 3rd quarter.[iv]


Looking back, the markets have come far from where they were 10 years ago. But risks will always remain, as Hurricane Florence and Lehman Brothers remind us. Today and in the future, we are here to help you understand where you are and plan for whatever may lie ahead.

Also, for those affected by the hurricane, we’re ready to support your recovery and provide the financial guidance you seek.

ECONOMIC CALENDAR

Tuesday: Housing Market Index

Wednesday: Housing Starts

Thursday: Existing Home Sales, Jobless Claims

DATA AS OF 9/14/2018 1 WEEK SINCE 1/1/18 1 YEAR 5 YEAR 10 YEAR
STANDARD & POOR’S 500 1.16% 8.65% 16.40% 11.47% 8.78%
DOW 0.92% 5.81% 17.80% 11.21% 8.64%
NASDAQ 1.36% 16.03% 24.59% 16.56% 13.48%
INTERNATIONAL 1.76% -5.45% -1.02% 1.65% 1.29%
DATA AS OF 9/14/2018 1  MONTH 6  MONTHS 1  YEAR 5  YEAR 10  YEAR
TREASURY YIELDS (CMT) 2.02% 2.33% 2.56% 2.90% 2.99%

Notes: All index returns (except S&P 500) exclude reinvested dividends, and the 5-year and 10-year returns are annualized. The total returns for the S&P 500 assume reinvestment of dividends on the last day of the month. This may account for differences between the index returns published on Morningstar.com and the index returns published elsewhere. International performance is represented by the MSCI EAFE Index. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.


[i] https://www.bloomberg.com/news/articles/2018-09-12/florence-to-batter-u-s-data-but-harm-to-economy-likely-small

[ii] https://money.cnn.com/2018/09/14/investing/lehman-brothers-2008-crisis/index.html

[iii] http://performance.morningstar.com/Performance/index-c/performance-return.action?t=SPX&region=usa&culture=en-US

[iv] https://www.msci.com/end-of-day-data-search

[v] https://www.cnbc.com/2018/09/14/september-consumer-sentiment.html

[vi] https://www.marketwatch.com/story/retail-sales-grow-by-smallest-amount-in-six-months-but-spending-primed-to-rebound-2018-09-14

[vii] https://www.marketwatch.com/story/us-industrial-production-up-for-third-straight-month-on-strength-in-autos-2018-09-14 [1] https://www.bloomberg.com/news/articles/2018-09-14/retail-sales-factory-output-signal-steady-u-s-economic-growth?srnd=markets-vp



Markets Up Again

Trade continued to dominate the news last week and cause market volatility as investors monitored discussions of the North American Free Trade Agreement (NAFTA) and tension with China. While Mexico and the U.S. reached a new trade deal early in the week, talks with Canada stalled on Friday, August 31. Reports also came out that President Trump may be adding tariffs on another $200 billion in Chinese goods.[i]

Domestic markets increased for the week and ended August in positive territory. The S&P 500 and Dow each had their best August since 2014—while the NASDAQ’s 5.7% growth was its best performance for the month since 2000.[ii] On Wednesday, the S&P 500 reached a new record high.[iii] For the week, the S&P 500 gained 0.93%, the Dow added 0.68%, and the NASDAQ increased 2.06%.[iv] International stocks in the MSCI EAFE joined the growth, adding 0.26%.[v]

Key Data From Last Week

Although trade might have dominated headlines, last week provided a number of informative economic updates, including:

  • Personal incomes grew in July.

The 0.3% increase fell slightly short of the projected growth but is still up 4.7% since this time last year. Combined with growth in personal consumption, this data indicates that consumers had a solid start to the 3rd quarter of 2018.[vi]

  • Gross Domestic Product (GDP) was higher than initially thought.

The 2nd reading of GDP expansion between April and June was 4.2%, higher than the initial reading and still the fastest economic expansion since 2014. Economists don’t believe this pace is sustainable, however, as rising interest rates, ongoing trade tension, and fading tax-cut benefits could slow growth later in the year.[vii]

  • Consumer confidence soared in August.

The latest consumer confidence data came in higher than it has since October 2000. This strong reading may indicate that consumer spending will remain healthy for now.[viii] Since consumer spending is more than ⅔ of the U.S. economy, its growth is a critical factor to track.[ix]

This week’s performance and reports once again underscore a message we have frequently shared with you: Instead of focusing on the headlines, pay attention to the fundamentals for a clearer understanding of the economy. If you have questions about how this data affects your financial life, we’re here to talk.

ECONOMIC CALENDAR

Monday: U.S. Markets Closed for Labor Day Holiday Tuesday: PMI Manufacturing Index, ISM Mfg Index, Construction Spending


[i] https://www.reuters.com/article/us-usa-stocks/wall-street-mixed-as-u-s-canada-trade-talks-end-idUSKCN1LG1IU

[ii] https://www.cnbc.com/2018/08/31/us-markets-global-trade-tensions-ramp-up.html

[iii] https://www.bloomberg.com/news/articles/2018-08-30/asian-stocks-to-weaken-on-tariff-plan-yen-rises-markets-wrap?srnd=markets-vp

[iv] http://performance.morningstar.com/Performance/index-c/performance-return.action?t=SPX&region=usa&culture=en-US

[v] https://www.msci.com/end-of-day-data-search

[vi] https://www.ftportfolios.com/Commentary/EconomicResearch/2018/8/30/personal-income-rose-0.3percent-in-july

[vii] https://www.bloomberg.com/news/articles/2018-08-29/u-s-second-quarter-growth-revised-up-to-4-2-on-software-trade

[viii] https://www.marketwatch.com/story/consumer-confidence-soars-to-18-year-high-2018-08-28

[ix] https://www.thebalance.com/consumer-spending-trends-and-current-statistics-3305916

There are New Developments in Healthcare Coverage!

Hello, Trumpcare!

What we see coming out in the next few weeks as the plans  available on the public exchange continue their meltdowns is this: a new “Short-Term Limited Duration” coverage plan that will span 36 months. The newest insurance regulations released have extended short-term limited duration plans out to 3-year terms in many states. These plans are alternatives to the ACA plans available on the public exchanges for those with pre-existing conditions. But, they promise to be more affordable, as the ACA plans aren’t realistic for the majority of Americans.We expect Georgia to soon approve this product line in the next few weeks. Stay-tuned to this space for updates.

Meanwhile, our Employer Select Group Plans* Have Doubled Their First-Dollar** Benefits!

*Available to groups of 10 or more. Groups of 5-9 enjoy 1/2 the total maximums with some exceptions. **First Dollar means the plan pays a defined benefit, as agreed, without you paying a single penny of deductible–$0 Deductible! Individual plans are available also. Contact us for details.

Don't Go Without Insurance!
Surgery is Expensive! Don’t Go Without Insurance!

Max Benefits are $5 million lifetime/$250,000 per Covered Person Per Year. Critical event coverage for Groups of 10+ start at $10,000 and range to a max of $40,000. That means you get a check in the mail for up to $40,000 if you are unfortunate enough to suffer a critical event! Individual plans allow critical-event coverage up to $50,000 in a lump sum payable to you.


This insurance actually pays as agreed, and you don’t pay a deductible. You pay any excess charges over the defined benefit. But, through Karis360, an additional service at no extra charge, your total bill is negotiated down from stated “retail” rates. 

M

MultiPlan allows PHCS network provider discounts, which average, all in-network charges are discounted 43% from stated “retail” rates. PHCS is the largest primary PPO network in the nation–available at no extra cost with over 900,000 providers. To check if your favorite providers are “in-network,” click the button:

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“Open the Pod Doors, Hal!” continued…Space Aging in a Hi-Tech Universe

Medication Reminders

New tools are already available to remind folks to take their medications. These of course avoid problems such as mixing doses, which can make an existing problem worse or even lead to an otherwise unnecessary hospitalization. Taking meds on time every time and no more times than appropriate will lead to lower costs for everyone–including the healthcare industry.

Portable Diagnostic Devices

As we alluded to in a previous post, many hi-tech diagnostic devices are now portable, alleviating the need for the patient to report to a lab for testing. As we age, more frequent tests are required so that providers can monitor existing conditions , diagnose new ones, or simply maintain status on a person’s overall health. These new devices perform blood and urine tests, store, process, and instantly transmit data to providers for analysis. Such real-time reporting allows earlier diagnosis of problem areas thereby allowing earlier treatment–again resulting in lower healthcare costs all-around.

Emergency Responder Systems

These individualized systems have been around a while. Updates during the new “Internet of Things” era have added to their utility such that they can detect a fall, alert family or care providers if a dementia patient has wandered outside a protected area, and even help guide a person back home safely through GPS technology. These smarter devices enable caregivers to multi-task such as buying groceries, running errands, or just working. Airbags are being built into belts (see ActiveProtective smart belts) to prevent fall-related injuries. Meanwhile, the belt signals providers that the wearer has fallen and will need assistance.

We’ll go into a few other areas next post. Meanwhile, if you or a family member needs to look into a matter–contact us either by phone, through email, or use the scheduling robot to set an appointment. We offer comprehensive analysis and solutions to address all aspects of Retirement Income Planning.

Today’s One-Time Testing Labs Will Morph Into Real-Time Monitoring and Evaluation Services

Roles for Tech in Long-Term Care (1):
 
We anticipate that today’s discrete element testing services such as the LabCorp and Quest Diagnostic types, will morph into real-time data gathering models using wearable or implantable devices. Implants like pacemakers have been around for decades. So we’d expect little push-back on those such devices. If we compare that experience with the new implantable glucometers, which can be implanted directly into the senior’s body to track vitals, then perhaps we will get a more welcoming atmosphere for hi-tech monitoring devices. The key to understanding the monitoring is to understand that the information gathered upon which the care team makes decisions is always accurate. Because they are connected, data from these personal devices will be sent to cloud servers by such firms where it will be analyzed and crunched to determine individual patient trends and insights for the patient themselves, and their doctors and family. Ongoing reports will show important discoveries such as a decline in sleeping or exercise, or that insulin levels rise or drop at certain points in the day. Medical intervention can also occur immediately when required. So this type of real-time monitoring will occur not only in hospitals, where we have grown accustomed to IV monitors and such constantly clicking off data observations, but also in the home and about town–for off-site physicians as well as the patient themselves or family members.
 
For those persons suffering from cardiac, diabetes, or hypertension, hi-tech solutions come as biometric sensors, and smart glucometers. These wearable devices track vital signs and send emergency emails or texts in real time to care providers if current reading are outside expected parameters. They can also detect low levels of movement and “abnormal sleeping habits.” Such constant data gathering and monitoring to state individual norms and tracking against those provides necessary information needed by care teams so they can track behavior patterns and check on patients as required.
 
Before we go into the privacy concerns that should be clicking off alarm bells in your minds, we’ll go through several other areas where tech will be constantly monitoring us. “I always feel like somebody’s watching me….”

Paul Tudor Jones (The Tudor Group) Says Brace for a “Frightening Recession”

Noteworthy for predicting the 1987 stock market crash, billionaire hedge fund manager Paul Tudor Jones warned investors at a Goldman Sachs “Talks” event that “we don’t have any stabilizers” to help stave off a deep recession at this time. “We’ll have monetary policy, which will exhaust really quickly, but we don’t have any fiscal stabilizers,” said Jones according to MarketWatch, which covered Goldman Sachs CEO Lloyd Blankfein’s interview of Jones on June 18, 2018.

Former Fed Chair Ben Bernanke also warns that the US economy is likely to nosedive once the massive dose of fiscal stimulus delivered by federal tax cuts and spending hikes wears off.

In particular, Tudor Jones noted that quantitative easing put in motion by the Fed in response to the 2008 financial crisis has produced real interest rates that not only are far below long-term historic norms, but also actually negative.

Tudor Jones elaborated: “You look at prices of stocks, real estate, anything. We’re going to have to mean revert to a normal real rate of interest with a normal term premium that’s existed for 250 years. We’re going to have to get back to that. We’re going to have to get back to a sustainable fiscal policy and that probably means the price of assets goes down in the very long run.”

CONTACT US to see how to plan for your needs in these uncertain times by using our appointment scheduler on this site to set up a discussion time.

Sources: https://www.marketwatch.com/story/hedge-fund-boss-who-predicted-87-crash-says-next-recession-will-be-really-frightening-2018-06-19; https://finance.yahoo.com/news/paul-tudor-jones-warns-next-recession-will-really-frigtening-203418073.html

Market Volatility Continues

Volatility continued last week as markets posted their 1st weekly loss in 3 weeks.[i] Despite some recovery on Friday, the S&P 500 dropped 2.04%, the NASDAQ slipped 1.12%, and the Dow lost 3.05% for the week.[ii] Internationally, the MSCI EAFE fell 2.91%.[iii]

Last week’s ups and downs began with continued questions over whether the Fed will raise interest rates. By the week’s end, however, rumors of an international trade war dominated the attention of investors.

Fed Suggests Raising Interest Rates

New Fed Chair Jerome Powell testified on Tuesday that inflation and a strong economy may lead to interest rate hikes sooner than expected.[iv] Whether the Fed will impose a 4th hike this year caused investor uncertainty and led to mid-week market drops.[v] Powell noted, however, that increased market volatility will not influence the Fed’s decisions regarding rate increases.[vi]

Trump Announces Tariffs on Imports

Investor attention shifted on Thursday as President Trump announced plans to impose a 25% tariff on steel and a 10% tariff on aluminum imports.[vii] While the move could protect American metal workers, some analysts worry it may also trigger a possible trade war.[viii]

Countries around the world reacted to the news, with some announcing their own plans for U.S. tariffs in response.[ix] Over the weekend, the President reacted by noting possible tariffs on imported autos, where the U.S. has a deficit. Some analysts worry this could further hurt an already negative trade gap in our Gross Domestic Product (GDP).[x]

Signs of Strength

Despite the developments with tariffs and rising interest rates, we did receive encouraging economic reports:

·       Strong Consumer Sentiment: Last month’s consumer sentiment report hit its 2nd highest recording in over 10 years. Upon the approved tax bill, companies gave nearly $30 billion in bonuses, boosting consumer incomes and attitudes.[xi]

·       Outstanding Jobless Claims: Last week’s reported jobless claims were the lowest in 49 years. A healthy demand for labor and few layoffs have helped keep unemployment numbers low.[xii]

What’s ahead?

Expect more market volatility going forward as investors follow the Fed’s interest rate plans to keep potential inflation in check. The President has also promised to announce specific details concerning the proposed new tariffs this week.[xiii] If you have questions concerning how these developing economic policies may impact your financial life, we are always here to help.

ECONOMIC CALENDAR

Monday: ISM Non-mfg Index

Tuesday: Factory Orders

Wednesday: ADP Employment Report

Thursday: Jobless Claims

If you want to learn how to customize your retirement portfolio into an allocation designed to manage volatility, Click Here to schedule a consultation!

[i] https://www.cnbc.com/2018/03/02/us-stock-futures-dow-data-earnings-fed-and-politics-on-the-agenda.html
[ii] http://performance.morningstar.com/Performance/index-c/performance-return.action?t=SPX&region=usa&culture=en-US

http://performance.morningstar.com/Performance/index-c/performance-return.action?t=@CCO

http://performance.morningstar.com/Performance/index-c/performance-return.action?t=%21DJI&region=usa&culture=en-US
[iii] https://www.msci.com/end-of-day-data-search
[iv] https://www.usatoday.com/story/money/markets/2018/03/02/world-markets-fret-over-trade-war-after-trumps-tariff-vow/388182002/
[v] https://www.usatoday.com/story/money/markets/2018/02/28/fed-chiefs-rate-talk-puts-stocks-bind/378755002/
[vi] https://www.cnbc.com/2018/02/27/fed-chairman-powell-market-volatility-wont-stop-more-rate-hikes.html
[vii] https://www.usatoday.com/story/money/markets/2018/03/02/world-markets-fret-over-trade-war-after-trumps-tariff-vow/388182002/
[viii] https://www.cnbc.com/2018/03/01/forex-markets-focus-on-dollar-moves-after-trump-tariff-decision.html
[ix] https://www.reuters.com/article/us-usa-trade/trade-wars-are-good-trump-says-defying-global-concern-over-tariffs-idUSKCN1GE1PM

https://www.bloomberg.com/news/articles/2018-03-02/trump-opens-door-to-trade-war-as-eu-threatens-iconic-u-s-brands
[x] https://www.bloomberg.com/news/articles/2018-03-02/trump-opens-door-to-trade-war-as-eu-threatens-iconic-u-s-brands

http://wsj-us.econoday.com/byshoweventarticle.asp?fid=492771&cust=wsj-us&year=2018&lid=0&prev=/byweek.asp#top
[xi] https://www.bloomberg.com/news/articles/2018-03-02/consumer-sentiment-in-u-s-at-second-highest-level-since-2004
[xii] http://wsj-us.econoday.com/byshoweventfull.asp?fid=485207&cust=wsj-us&year=2018&lid=0&prev=/byweek.asp#top
[xiii] https://www.reuters.com/article/us-usa-trade/trade-wars-are-good-trump-says-defying-global-concern-over-tariffs-idUSKCN1GE1PM

S&P 500 Could Fall 60%: Hussman

Citing fundamentals, cash distribution, and valuation as the source of stock market gains, Wall Street analyst and fund manager John P. Hussman points out that, while historically high, all are drastically slowing to what many would call a point of no return. “Consider these drivers today. Combining depressed growth prospects with an S&P 500 dividend yield of just 2.0%, the likelihood is that over the coming 10-12 years, even a run-of-the-mill reversion of valuations will wipe out the entire contribution of growth and dividend income, resulting in zero or negative total returns in the S&P 500 Index on that horizon, with an estimated interim market loss on the order of -60%,” Hussman said in his post.

How Expensive Is the S&P 500?
The S&P 500 traded at a record high Monday, trading to within a few ticks of 2500. With this, it dragged the forward 12-month EPS to a record high and the 12-month price to earnings ratio to levels not seen since the pre-Dotcom era. But even these stretched levels don’t uncover the extent of the over-valuation. “Notice that the distinction between today and the 2000 peak is in the breadth of overvaluation across individual stock,” Hussman said in an August post.
“As of last week, with the exception of the richest decile of stocks, where median valuations were higher only during the January 2000-March 2001 period (followed by median losses exceeding -80% for those stocks), every decile of S&P 500 components is currently at or within 2% of its most extreme valuation in history.”
Arguments for a stock market correction clutter financial publications every morning. All will be correct at some point, but as Keynes said, in the long-run we’ll all be dead. But what’s different about this one is not just the magnitude of the correction, but where it begins. “During the journey of Empress Catherine II to Crimea, Prince Grigory Potemkin, the governor of the region, erected fabricated villages along the Dnieper river” That’s Wall Street analyst and fund manager John P. Hussman whose outlook is dire than any Wall Street bear going around. (See also: Bear Market Ahead: What 5 Big Investors Forecast)
Citing fundamentals, cash distribution, and valuation as the source of stock market gains, Hussman points out that, while historically high, all are drastically slowing to what many would call a point of no return. “Consider these drivers today. Combining depressed growth prospects with an S&P 500 dividend yield of just 2.0%, the likelihood is that over the coming 10-12 years, even a run-of-the-mill reversion of valuations will wipe out the entire contribution of growth and dividend income, resulting in zero or negative total returns in the S&P 500 Index on that horizon, with an estimated interim market loss on the order of -60%,” Hussman said in his post.

Hussman Isn’t the Only Doom-Sayer
While the extent of Hussman’s call is frightening, he is not alone in calling for a stock market correction. Deutsche Bank said recently that the probability of a recession is at the highest level in ten years saying a flattening yield curve means investors are bracing for tough times ahead by investing in longer term Treasuries, which has pushed the yield curve to levels last seen before the Great Recession.
The Number of Nay-Sayers Who Have Been Wrong Increases, But…
September 4 marked the 300th consecutive trading day the S&P 500 has been above its 200-day moving average, which is the 15th longest since 1923, and while valuations continue to stretch and the number of people calling for a correction grow, so does the number of those who have been wrong.
However, if Hussman is correct, then the Potemkin villages will, in fact, be as valuable as those pieces of paper representing the S&P 500: “temporarily glorious and impressive on the surface, but backed by much less than investors had imagined was there.”

Contact us to see what you can do to traverse these uncertain markets.

Sources:
Investopedia.com; HussmanFunds.com

Markets Keep Screaming North, Euphoria Sets In–Are You Protecting Your Retirement Income?

Am I being overly paranoid to worry about the stock market during a week when the Dow finally reached the 22,000 mark. Even the fact that the move was largely on the shoulders of Apple’s jump higher after it released great earnings news shouldn’t make much of a difference. The trend is the trend, and it is still to the upside. So, is there no end in sight? Euphoria, etc., we’ve seen this before. Make money on the up moves while you can, it’s fun! But don’t gamble with your Retirement Money by leaving everything “on the table.”

Red Flags
While the Dow and other major market indices soar, danger signs and red flags abound, as technical analyst Michael Kahn points out in his Barron’s column. August typically has relatively low trading volume, Kahn writes, and this means that a slight change in mood among a relatively small number of traders on the margin can produce big market swings. He notes that the flash crash of 2015, when the Dow shed 1,100 points in just 4 minutes, took place on August 24 of that year.

Worries about narrow market leadership by, and high valuations on, big tech stocks are one potential trigger for a correction that Kahn mentions. Others that he does not mention include: potential international crises involving North Korea and Russia; political controversies swirling around president Trump, such as the Russia investigations; Trump’s threats to launch trade wars; and the anemic U.S. economy.

Other predictions from five well-known market gurus, all trend bearish. Overvalued stocks were a chief concern of: Tom Forester, the founder of Forester Capital Management; Marc Faber, a consistently bearish newsletter author; and Rob Arnott, a pioneer of smart beta investing and the CEO of investment advisory firm Research Affiliates LLC. For his part, Forester added that the last two general market crashes were touched off by a collapse of investor confidence in a single sector. In the year 2000 it was tech stocks, and in 2008 it was financials. Faber also worried about narrow market leadership, with small numbers of stocks driving the major indexes upward.

Jim Rogers, who co-founded the Quantum Fund with George Soros, expressed concern over debt loads that are higher than prior to the financial crisis in 2008. Legendary bond fund manager Bill Gross, formerly of PIMCO and now with Janus Capital Group LLC, also worried about high indebtedness, weak productivity growth in the real economy, and an oversized financial economy. Earlier this year, Gross issued warnings similar to those made by Greenspan recently: that is, central banks’ massive infusions of liquidity since the financial crisis have created huge economic and financial distortions that will unwind with unpleasant market outcomes. (For more, see also: Bear Market Ahead: What 5 Big Investors Forecast.)

Bond Bubble?

For yet another source of worry, former Federal Reserve Chairman Alan Greenspan is warning of a bond market collapse that would bring down stocks. Greebspan says this is likely to happen after interest rates shoot up much faster than many people anticipate. (For more, see also: Stocks’ Big Threat Is a Bond Collapse: Greenspan.)

Unsustainable Interest Rates

“By any measure, real long-term interest rates are much too low and therefore unsustainable. When they move higher they are likely to move reasonably fast. We are experiencing a bubble, not in stock prices but in bond prices. This is not discounted in the marketplace,” Greenspan comments to Bloomberg.

When central banks start withdrawing liquidity from the financial system in earnest by selling their bond holdings, Greenspan believes that long term interest rates will spring sharply upwards. Thus, bond prices will collapse. Greenspan says that would lead to the worst bout of stagflation since the 1970s, a period when inflation accelerated amid a stagnating U.S. economy. This environment would spark a nosedive in stock prices, Greenspan continues, because sharply higher bond yields could spur a massive movement of investor capital from equities to fixed income instruments. (For more, see also: Bill Gross: QE is “Financial Methadone.”)

The Fed Model

The so-called Fed Model consulted by Greenspan, as explained by Bloomberg, compares the yields on 10-year U.S. Treasury Inflation Protected Securities (TIPS) to the earnings yield on the S&P 500 Index (SPX). The current figures are 0.47% and 4.7%, respectively, per Bloomberg, which notes that the gap between the two measures is 21% greater than its 20-year average. For those who subscribe to this analytical framework, high valuations for stocks are justified for now. However, another spin on this analysis, per Bloomberg, is that investors are justified in buying the less inflated asset. If bond prices rapidly deflate, as Greenspan foresees, stock prices will soon follow.

Your Money

My question to you is, “If market experts are worried about rapid reallocations occurring in the macro scale, why aren’t you concerned about the impact on your IRA/401k, and other retirement assets?” Contact me now to schedule a discussion and review options available for your family’s security.

Read more: Stocks’ Big Threat Is a Bond Collapse: Greenspan | Investopedia

Read more: What to Do When the Bubble Bursts: 3 Takes | Investopedia

Read more: Stocks Surge 20% Under Trump Amid Warning Signals | Investopedia

Time to Leave Behind the 2008 Financial Crisis and Look Overseas Again?

Well respected analysts and market participants alike are behaving as if we’ve finally turned the corner on the worst financial calamity of this century, albeit barely getting underway. We are almost ten years post-crisis. Ergo, it may be time to reassess asset allocations. But, it could be a big mistake to merely extrapolate the cyclical trends of the past economic cycles. Some say that re-emergence from burst credit bubbles are different from cyclical recessions. If, as some believe, asset allocation is about finding market asymmetries—that is, areas where the consensus may be wrong and the cost of exposure is low, thus the investment opportunity is mispriced and tilted in your favor, then one such asymmetry is in those tame expectations for inflation. What if inflation exceeds those expectations? Perhaps economically sensitive equities are a way to benefit. Many are starting to look at dividend-paying companies and small to mid-size capitalized stocks to take advantage of high operating leverage to increasing growth and price trends. Many of these equities offering opportunity are appearing in overseas markets. But focus:  what worked in the past may not work again in the future.

New secular drivers may be at play as new nations entering phases of rapid development. Shorter-term changes in politics and policy that marked the current era may beg for a reassessment of one’s portfolio. Many anticipate new policies to spur global growth are in stark contrast to previous policy driven influences such as Quantitative Easing and negative interest rates from 2008-2016. Analysts at Bloomberg expect real GDP plus inflation to improve to roughly 6% growth over the next two years as inflation and real growth increase.  Deutsche Bank analysts think productivity is likely to decline. Well, if low-cost labor will no longer propel productivity and deflation globally, perhaps due to robots filling in every aspect of our economies globally, then one may investigate ways to benefit should inflation exceeds expectations. The natural place to investigate then, is China,manufacturer for the world. And, indeed the Chinese producer price inflation is back in positive territory for the first time since 2012.

So, if US long-term treasuries were the safe-haven for the 2008 deflationary cycle, Lord Abbett analysts suggest that “economically sensitive equities” are the place funds should flow out of bonds to benefit from a return of inflation. They like a focus on dividend-paying companies as dividends grow with inflation over the medium term. They also like small and mid-cap stocks as such tend to have high operating leverage to increasing growth and pricing trends.

They also suggest that assets positively correlated with inflation, negatively correlated with higher interest rates, and relatively low volatility may be another ideal hedge. But, Lord Abbett isn’t thinking of TIPS or commodities. Rather, a combination of inflation index forward contracts anda a short-maturity income fund would provide the best combination of those factors. So, if this strategy sounds appealing, then an inflation focused strategy may be a great approach.

Finally, a strong US dollar weakening, coupled with excessive pessimism caused by political turmoil in Europe and Asia could set the stage for another asymmetry to exploit. Recent economic indicators from overseas (China; Europe) have exceeded expectations and several leading indicators show a broadening of growth around the world, not a weakening. More than 90% of the world’s manufacturing purchasing manager indexes are above 50-showing they are in expansion.

If your portfolio is based on the trends of the past cycles, it may be time to reassess the new world dynamics and consider reallocation according to your risk appetite.

NOTE:  Small-cap and mid-cap company stocks tend to be more volatile and can be less liquid than large-cap company stocks. Due to market volatility, the market may not perform in a similar manner in the future. Dividends are not guaranteed and may be increased, decreased, or suspended altogether at the discretion of the issuing company.

This article may contain assumptions that are “forward-looking statements,” which are based on certain assumptions of future events. Actual events are difficult to predict and may differ from those assumed. There can be no assurance that forward-looking statements will materialize or that actual returns or results will not be materially different from those described here.

Forecasts and projections are based on current market conditions and are subject to change without notice. Projections should not be considered a guarantee.

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