During a cyclical bull market, many people start to question what could go wrong that could change the direction of the stock market and initiate a downturn.
From experience, I find that to be foolhardy because it’s usually that one thing we don’t think about that comes in and, as my good friend from Iowa says, “bites you on the cheek meat.”
When the Tech Bubble was occurring in 1999, everyone knew that tech stocks were overinflated, and that started a market downturn. However, what really accelerated it was WorldCom, Enron, and 9/11. Those things combined to really provide a tipping point that caused a more precipitous selloff.
During the Financial Crisis, we knew the Sub-Prime Mortgage Crisis was at hand. But what no one realized was the extent to which these financial companies had irrevocably tied themselves together with those insurance contracts called credit default swaps. So, when one company started to struggle, they all struggled.
During both of those situations no one could have foreseen Enron’s accounting scandal, 9/11, or the credit default swap issues.
Over the last several months, during what I call the blow off period to the stock market, everyone has been focused on the good news of the day and has been largely ignoring the bad news.
When a tipping point begins, it turns the direction of the market, and people start focusing a little bit more on the bad news. If that bad news creates a slight economic downturn, not significant but just enough, it can create a cascading effect that keeps the markets sliding downward.
So, the question becomes: is the coronavirus that tipping point?
Well, it has all the makings of a tipping point because of the fear, the severe effect it could have on world trade, and because it’s something that’s getting so much attention in the media.
However, we also know that it’s an election year and the President is going to do everything in his power to get re-elected.
Will President Trump get Chairman Powell and the Fed to step in and offer some sort of economic stimulus that might help to temporarily reverse this downward trend from the coronavirus? Or, perhaps as the weather gets warmer, will the spread of the disease slow and allow a vaccine to be developed?
Well, if the coronavirus turns into what we call a black swan event where the virus does spread throughout the United States, then it might be the tipping point. Otherwise, it might not. So what about other tipping points?
What would a socialist candidate taking the lead for the Democratic Party’s nomination after Super Tuesday do? The coronavirus might not be the only potential tipping point.
Like I frequently say on The Income Generation Show, with so many potential skeletons in the world’s economic closet, it’s only matter of time before one of these issues becomes more than just a scare and initiates the next major stock market correction.
So, what can you do to prepare? Well, the first step should be to make sure you’re not over-exposed to stock market risk—especially if you’re retired or close to retirement.
Something else you should do is to keep yourself informed about the financial issues that could impact your quality of life in retirement. Tuning into the “Income Generation Show” each Sunday on Newsmax TV is a good way to do that. Another a great resource is The Retirement Income Store® Newsletter.
David J. Scranton, CLU, ChFC, CFP, CFA, MSFS, is a nationally renowned Money Manager, Amazon Bestselling Author, national TV Host of The Income Generation, Founder of Sound Income Strategies, LLC, The Retirement Income Store®, and Advisors’ Academy. With over 30 years of experience in the industry, Dave specializes in income-generating savings and investment strategies.
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