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Stock Markets Are Trying to Say Something: Are You Listening?

Stock Markets Are Trying to Say Something: Are You Listening?

By Thursday, 03 May 2018 02:17 PM Current | Bio | Archive

After shooting off to all-time highs earlier this year, stock markets have dropped significantly.

After a few weeks of multi-hundred point drops and gains, shooting back up over 25,000 points, the Dow Jones Industrial Average is now struggling to stay at 24,000 points. After a two-year run that saw markets gain over 60%, the past three months have seen stagnation.

Markets are trying to send a signal, letting investors know that the bull run is over. But are they listening?

The Crash Isn’t Always Sudden

When we think of stock market crashes, we often think of momentous occasions. We think of Black Tuesday in 1929, when the Dow lost 12 percent of its value, having just dropped 13 percent of its value the previous day. Or we think of Black Monday in 1987, when the Dow lost nearly 23 percent of its value in a single day. So many people expect a stock market crash to be a calamitous drop that they fail to pay attention to the slow, methodical stock market decline that is far more dangerous and that warns investors that a crash is around the corner.

The financial crisis of 2008 may have seen large stock market drops during its most acute phase, but it took several months to get there. Markets topped in October 2007 when the Dow broke 14,000 points and then spent months bobbing up and down, still at around 13,000 points by the end of May 2008. Steady declines saw the Dow nearing 11,000 by the end of September. That was bad, but the worst was still to come. Within a month the Dow had lost almost another 3,000 points, dropping close to 8,000 points. It continued to decline, finally bottoming out at around 6,500 points in March 2009, a drop of more than 50% from its high.

The dotcom bubble followed a similar pattern, peaking at over 11,700 points in 2000, peaking at over 11,300 points in 2001, and still remaining at over 10,600 points in early 2002. That’s over two years to lose only about 10% of its value, not the kind of performance that investors like to see, but not exactly performance that would make most investors panic and sell their assets. From there, stock markets began a slow decline over the next few months, accelerating over the summer, before bottoming out in October 2002 at under 7,300 points.

The key takeaway from all of this is that stock market declines don’t occur overnight. Aside from Black Monday and Black Tuesday, most stock market declines, and especially the two most recent ones, could have been predicted by savvy investors who noticed the signals markets were sending. Market peaks and troughs won’t always be apparent except in hindsight, but it doesn’t have to be years for that hindsight to be noticeable.

Why Were Stock Markets Peaking?

The reason stock markets had risen so high in the first place was because of the loose monetary policies pursued by the Federal Reserve System. Monetary pumping in the late 1990s spurred the dotcom bubble and its overvalued stock prices. The bursting of the stock market bubble in 2002 was papered over with even more monetary easing, with the Fed pushing rates down even lower, leading to the creation of the housing bubble.

That bubble collapsed spectacularly, leading the Fed to engage in an unprecedented amount of monetary easing in an effort to boost markets. That quantitative easing finally began showing up in stock markets two years ago, buoying the fortunes of tech stocks such as Facebook, Apple, and Netflix. Now that the Dow hit record highs almost month after month, it’s clear that we’ve seen the market peak, and it’s only a matter of time before the bottom drops out.

Protect Yourself Before It’s Too Late

If you’ve ever read investment advice about stock markets, you’ll probably hear a lot of people advising you to keep your money in the market no matter how sharp the downturn. From those who advise you to “buy the dip,” to those who claim that passive investing and ignoring downturns is superior to trying to time markets, everyone tries to ignore the clear signs that stock markets may have peaked, instead claiming that every downturn is just a momentary blip on the way to permanent gains.

The euphoria that led to claims of Dow 36,000 is now leading to claims of Dow 50,000. But the reality is that the Dow will be closer to 15,000 than 50,000 when the next crash finally comes to fruition. Those who don’t take steps to protect their investments stand to lose a great deal of money.

Gold Has Outperformed Stock Markets This Century

Worries about the direction stock markets will take has made many investors nervous, particularly those who are heavily invested in stocks and stand to lose a bundle, and those who are close to retirement and don’t want to see their retirement nest egg lose its value. They are looking for safe havens to place their assets to ensure that no matter how poorly the markets perform in the coming years, their assets will be safe.

Gold is ideal for investors in that situation. It has been trusted as a safe haven for centuries, keeping its value against inflation and serving as a safe haven asset in times of economic turmoil. When stocks lose value, gold continues to gain value.

Gold has even outperformed stocks since the beginning of the 21st century. Gold started out 17 years ago at $268 per ounce and now sits at over $1300 per ounce, an average annual increase of 9.6%. Compare that with the Dow Jones, which went from 10,800 points to 23,900 points over that same period, an average annual increase of 4.7%, or the S&P 500, which went from 1,320 points to 2,635 points, an average annual increase of 4.1%.

It’s clear that stock markets have peaked and will start a slow and steady decrease in the coming months. Those who move to the safe haven of gold stand a good chance not only of stanching their losses, but also of continuing to make gains into the future.

Trevor Gerszt is America's Gold IRA Expert, CEO of Goldco Precious Metals, and holds a position on the Los Angeles board of the Better Business Bureau.

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After shooting off to all-time highs earlier this year, stock markets have dropped significantly.
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Thursday, 03 May 2018 02:17 PM
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