Is The Party About Over In The Stock Market?

In Articles, Investment Management, Weekly Articles by Adam Cufr

Since March of 2009, the stock market (‘The Dow’) has experienced a breathtaking rise from a value of roughly 6,500 up to over 22,000. This has lead many investors and pundits to question how high it will go, and when the next recession may be occurring. After all, memories of 2008 are still very vivid for most of us, which caused us to get down to that 6,500 value from over 14,000 just months before. Since most of the families we serve are now 9 years older than they were in 2008 (not me, I’m ageless), and many more have retired from long careers, the stakes are higher than before. This leads to the question you may be asking: “Is the market poised for a big drop, and when?”

Of course, I don’t know exactly when or how much the market will fall. But what I can share with you is what we’re watching for, which may provide clues to what’s coming. I’ll also offer some thoughts on what we’re doing to prepare for it.

As many of you are aware, we work very closely with Stephen Hanley of Evergreen Wealth Management. While I’m meeting with families and building retirement plans, Steve is poring over market data, trend-spotting, and fine-tuning client portfolios to meet client objectives. This singular focus allows him to offer great insight on what indicators are worth looking into from the markets and the economy that may signal that changes are coming. Here is an inside look at part of the process Steve and his team uses.

Recession Indicator / Business Cycle Data Review

Below are the key data points, variables we look at:

  1. 10-year treasury yield and 3-month treasury bill yield Spread
  2. Freight Index
  3. Non-Farm Payroll Employment
  4. Industrial Production Index
  5. Real Personal Income
  6. Real Manufacturing and Trade Sales
  7. S&P500 movement, P/E, P/CF, number of profitable companies and Earnings
  8. Projections
  9. Continuous Claims Seasonally Adjusted
  10. All Employees: Total Private Industries
  11. New houses for sale
  12. New houses sold

The key recession probability models we monitor that put these variables together for a more clear framework are:

  • Dynamic Linearly Detrended Enhanced Aggregate Spread (DAGS)
  • Business Cycle Index
  • Yield Curve Model
  • Smoothed FED US Recession Probability Model

So, if most of that sounds Greek to you, that’s okay. Here is a summary thought from Steve that may be helpful:

“The country’s GDP (Gross Domestic Product) appears to be stable and accelerating, which could give a final flurry of growth to the equity markets over the next year or so. The best defense against a possible market downturn may be capturing this flurry as we usually push into bubble territory in the late stage. This is good and gives us time to strategically adjust, build some cash, and remain balanced. Not all recessions result in market declines or major market declines, so we need to be careful of allowing the “r” word to force bad short-term investment decisions that could wreck a long-term plan. Easier said than done; but long-term focus, balance, and trimming the tree for the winter to come, is a prudent approach. Any drastic moves may have drastic consequences. We will stick with the proven methods.”  

In short, we’re collectively watching as events unfold. Please keep in mind that market timing (moving investments into and out of the market to try to beat the market) has been proven to not work. As a result, getting properly positioned in your planning and investment strategy before events occur is the most prudent approach. Please let us know if we can help you find additional comfort in your efforts to prosper regardless of whether markets rise or fall. After all, a successful retirement is all about doing the things you want to do, regardless of what markets do in the short-term.

All the best,
Adam Cufr Signature

Adam Cufr, RICP®