Amid the current market volatility, it’s easy to forget that we enjoyed record calm seas and gains in January. Back then, on Friday, January 26, the stock market was on track to break the all-time record for the longest streak without a 5% drop set in 1959. It would have been a closed deal at the end of February. In October, the S&P 500 eclipsed the record for consecutive days without a 3% drop and was building it with each passing day. Volatility, as measured by the VIX index, had recently hit record lows. The average market open / close difference had been 0.3%, the lowest since 1965. What could interrupt this unexpected sea of tranquility? A lot of!
All of that was removed a week later. On Friday, February 2, the 3% streak came to a halt when the market fell 3.93% below the intraday high reached on January 26. With a better-than-expected employment report (200,000 versus 180,000 expected) on February 2 and wage growth rebounded in the With the fastest clip since the recession, there was a widespread fear that renewed growth prospects would force a the Fed to raise rates more aggressively than announced. The 4.60% drop the following Monday made it clear that what started as an organized exit from high-dividend-yielding stocks had turned into a market-wide stampede. It didn’t help that perfectly priced top flyers like Google and Apple had disappointing earnings reports.
The February 5 crash ended the market’s quest for the longest streak without a 5% drop. It was the worst drop since August 8, 2011, 4.62% at the time, and the worst point drop in the history of the Dow Jones at -1175. The VIX index, which had stood at 11.08, rose to 37.32. It could have been worse. The Dow Jones fell to 1,597 points in the middle of the afternoon. Two weeks after the market closed in record territory, it went through a correction.
Those who had been lulled into complacency got rude awakening. That quiet stroll of the market whisper wasn’t the new normal, but it may have been a fabulous truce before the storm. Therefore, those entertained who dive back into the market may want to put that off. Despite the recovery since then, what started as a knee-jerk reaction to rapidly rising bond yields may turn into something much more dire. Indeed, a financial storm is brewing and, like the record-breaking calm, it will be of historic proportions. What we have witnessed so far are only the first labor pains. The recent increase in volatility is testament to the paradigm shift with 1% more days, a rarity the year before, 48% of the time.
The causes of the emerging storm have little to do with our huge national debt, the Fed’s high balance sheet, or the collapse of the dollar. The first two can come into play to some degree once the collapse is underway, but we’ve heard about them for years to no avail. The third is unlikely to materialize. No, the forces involved are more tangible, safer, and have a more predictable timeline. Its effect will be manifested in the market soon. Of course, soon is relative.
Humans go through life cycles and, when combined with demographics, help us predict future economic trends. Sadly, this combination predicts a steep spending deficit that will have dire consequences on our economy and stock market. How big is the deficit? About $ 686 billion in total cumulative from this year through 2023. We all know that every dollar spent multiplies multiple times in our economy. This is what we call the velocity of money. When taken into account, the figure is at least $ 3.43 trillion. Oh! That’s more than double the 10-year revenue reduction, $ 1.5 trillion, from the Trump Tax Plan – The Tax Cuts and Jobs Act – and just slightly less than the $ 3.654 trillion the Trump administration is forecast to take. USA will receive this year. according to the Office of Management and Budget.
Let’s put these figures in perspective. During the Great Recession, the federal government spent approximately $ 3.40 trillion to stimulate the economy from $ 614 billion in lost basic expenses and about $ 1 trillion in real estate losses. Yes, you are reading it right. It took more than twice the federal spending to make up for consumer losses in spending and real estate. And that inefficiency is normal. Given the same multiplication, a government package of $ 7.22 trillion will be needed to address this new deficit in the economy. That equates to two years of individual income taxes, corporate taxes, and Social Security and Medicare taxes combined! If that’s the size of the package, imagine the size of the financial storm. It will dwarf the financial crisis and last twice as long.
If you invest in the stock market, your portfolio will see great success. Therefore, it would be wise to make changes to future allocations and start limiting your exposure to stocks now. Many will call me irresponsible, but when what I predict takes hold, you will want to get out of the stock market entirely.
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