Listen Closely to What the Market’s Telling You

Original post

 “How’s your 401(k) doing?”

– President Donald Trump

That is the question President Trump was regularly asking audiences at the end of 2017.

Since then, Trump has slowly eased this bit of rhetorical flourish out of his campaign trail repertoire.

That’s no surprise.

After all, the S&P 500 is trading today at a level it first saw in mid-January.

And after a choppy six months, the question on investors’ lips today is…

How will the U.S. stock market fare for the remainder of 2018?

A Bull Market Like (Hardly) Any Other

Let’s review where the U.S. stock market stands today.

U.S. stocks have been in a bull market since March 2009.

Few market pundits called the market bottom better than then-newly-inaugurated President Barack Obama.

As Obama said on March 3 of that year…

What you’re now seeing is profit and earnings ratios are starting to get to the point where buying stocks is a potentially good deal if you’ve got a long-term perspective on it.

(Although I’m not sure what “profit and earnings ratios” means, the market hit bottom on March 9.)

That was just over 3,400 days ago.

That places the current bull market at less than 50 days short of the longest post-1945 bull run in U.S. history – October 1990 to March 2000.

And what a bull market it’s been.

Since March 2009, the U.S. stock market has risen by about 400%.

That easily eclipses the 283% average rise of the 10 prior post-war bull runs.

If the U.S. stock market makes it to September without a 20% pullback – the technical definition of a bear market – the current bull run will be the longest on record.

Still, it hardly feels like a bull market out there.

Yes, the S&P 500 closed the first half of 2018 slightly higher than where it opened the year.

But the MSCI World Index of developed-country stocks slipped by 1.3%.

That made it the worst first half of the year for global stocks since 2010.

So what explains the recent pause in the bull market’s relentless rise?

Blame the negative market sentiment engendered by the Trump trade wars.

Blame the Fed’s rate hikes.

Blame the waning stimulus of U.S. corporate tax cuts.

Blame the backdrop of high U.S. stock valuations, by some measures the second highest in history.

Whatever your favorite explanation, we can all agree…

This bull is hardly partying like it’s 1999… or even 2017.

What the Market Is Saying

So how do I expect the U.S. stock market to fare for the last six months of the year?

That’s the wrong question.

Instead of making bold predictions, I prefer to listen to what the market is telling me.

Right now, it’s telling me that U.S. small caps are a good place to be.

It’s telling me to avoid emerging markets’ assets – both stocks and bonds.

It’s also telling me that a combination of labor shortages across the globe, the price of real estate in prime locations like Silicon Valley and record levels of U.S. consumer debt…

Mean that we are approaching the end of the current bull run.

So why do I personally remain fully invested in the market?

I don’t see any of the “this time it’s different” thinking that almost always characterizes stock market tops.

And shoeshine boys and taxicab drivers aren’t doling out stock tips.

Still, I would be foolish if I weren’t preparing for the inevitable downturn.

That’s why my personal investment watch list now includes several “short” exchange-traded funds (ETFs).

This list includes the ProShares Short S&P500 (NYSE: SH) – an inverse bet on the S&P 500.

If the S&P 500 drops by 20%, this ETF is designed to rise by 20%.

The good news is there are many similar ETFs based on the Dow Jones Industrial Average or the Nasdaq.

None of these ETFs were around when the market crashed in 2008.

But today you can invest in each of them to profit from any future market decline.

Let me be clear…

I’m not expecting the U.S. stock markets to crash anytime soon.

But I am preparing myself for when that time comes.

I recommend you do the same.

Good investing,

Nick