The Dow dropped over 600 points on Friday. That’s nothing new, as this happened plenty of times in 2018. And, it’s only one day. But wait, there’s more.You see, this phase of the long bull market cycle that started in 2009 is giving us more and more clues all the time. The trick is to piece them together. And, you have to maintain your humility and frustration when everyone around you seems to think the party just started. More likely, it is close to ending.The Coronavirus is a horrible development from a human health standpoint. Secondarily, it is causing governments and businesses to make difficult decisions. However, there is one thing that the financial media does every time something like this comes along. And, it’s doing it again.Markets have been brushing off developments in the global economyand the internal condition of the stock market for about 3 years. That shows a strong will on behalf of investors to stay positive. That’s nice. However, it only extends the bull market. It doesn’t make it vanish like the Wicked Witch of the West.Understanding that, if we simply take account of what else is going on, now that the Coronavirus is stoking fear and economic alarm across the globe, we can decide what to do next with our assets. I have explained that as part of an ongoing dialogue in this space for a couple of years. Now that the “something” came along to potentially prick the stock market bubble, let’s take a bottom-line view of what the investment landscape looks like, right now.I track an ongoing list of potential investor stress points. Here are a few that have quickly become the most prominent, given Friday’s sudden stock markettumble.It’s falling at an accelerating pace.
The Institute of Supply Management (ISM) Manufacturing Survey fell hard late last year. More recently, last Friday’s Chicago Purchasing Manager’s Index Data signaled that things are getting worse, not better for the global economy. Ironically, after all the back-and-forth over China-U.S. trade relations, China’s economy is now transporting an economic recession anyway. Some of the weaker European nations are already there.
A variety of formal and informal sentiment indicators have been flashing warning signs for months. Some of this can be easily documented. Others are more about what those of us who were managing money during the Dot-Com buildup and bubble felt like. And, the similarities to today’s environment are striking.However, none of that matters until stock prices dive. As I noted elsewhere late last year: I will feel that we’ve reached the top of the bull market when we get something more confidence-shaking. I think that is more likely in 2020.Perhaps the growing weakness of the market condition made it susceptible to an illness out of left field, so to speak. That illness appears to have come in the form of the Coronavirus.
S&P 500 index funds have essentially become the “slam-dunk” of our generation. The investing public has been conditioned to think that the S&P 500 is “the market.” At the start of bull markets, when everything is way down, that makes sense to me. However, as the bull rolls one, it requires more careful analysis than that.Here is a quick look at what I mean. This shows the S&P 500 and various slices of it over the past 12 months. The “headline” index is in blue, up over 21% during that time. However, the tech sector, which makes up over 20% of the S&P 500, is up more than double that! And, within that sector, a small number of stocks are carrying the weight. This is classic late bull market behavior.Also, see the red and green lines at the bottom. That shows you that dividend stocks in general have severely lagged the “headline” S&P 500 Index. And, the red line shows an ETF that tracks many of the highest-yielding S&P 500 component stocks. Bottom-line: when dividends are treated as way less important by investors, it’s a sign of overconfidence. Mrs. Market likes to eat that for lunch.Here is the same set of S&P 500 and slices, but just for January of this year. Tech way up, overall index up until Friday’s plunge, and dividends stocks treated like garbage. That all checks out to me. This is a market decline worth paying attention to.
Importantly, all of these market and economic ailments all predated the outbreak of the Coronavirus. However, if you are looking at it with some real perspective, it was only going to take one shock to the system to tip things over. It’s as if the market had its fingers crossed for months. But that old superstition didn’t work this time. Imagine that!
If you are nearing retirement or already in it, this is the ideal time to adopt a hedged investing approach. That is, don’t just leave it to the market to work it all out for you. 60/40 portfolios are a marketing gimmick that happened to work well for a while, since stocks and bonds were in bull market mode. That’s changing rapidly, as Friday reminded us. Expect more warnings in the near future.As for what to do, the key is not to stand still. I have written several articles about alternatives to traditional investment approaches, so peruse those for a more robust picture. As we observe the follow through from Friday’s drop, I plan to be active in my commentary here, so stay tuned.