Stock markets can be volatile. You’ve been reminded of that over the last week.
It’s led some to make sweeping statements about a market crash.
Just keep a couple of things in mind when reading such analysis.
One, the US economy remains strong.
US jobless claims have dropped to their lowest level in nearly 45 years!
That means the US jobs market is in the best shape it’s ever been in most people’s living memory.
It’s not surprising then that consumer confidence is sky-high. US consumers are spending at their fastest pace in nearly a decade.
And they’re making big purchases too. Housing starts in the US just hit a 10-year high.
As for US corporate earnings, those results are still coming in. But those companies that have reported are posting strong results.
Companies like Intel, Amazon, Facebook, Apple and Starbucks have all reported record-breaking revenues.
This is why stocks have been rising strongly.
And that brings me to the second point. The other thing to keep in mind is that, since the low in February 2016, US markets have gone on a run with barely any down move.
But stocks are fully priced now and a selloff was always on the cards.
There comes a point when you stop chasing even good companies, and when stocks must retrace.
Corrections are normal in bull markets. The market needs to catch its breath and consolidate prior gains.
What’s funny about all this that is if you ask any analyst, they’ll tell you stock market corrections are completely normal. That is, until the very moment we get one!
The fear around markets right now has to do with interest rates. The Fed might be forced to hike rates quicker than expected to stop the economy from overheating. The thinking goes that this might tip the economy into recession.
It’s been some time since the Fed ended its last rate hiking cycle in 2006.
Those new to the stock market don’t even know what it’s like to have a Fed in tightening mode.
So you can understand why markets might be nervous. The realisation that the era of cheap money is rapidly coming to an end has left markets spooked.
The idea here is that monetary tightening will be negative for stocks and more broadly for the economy. That the higher cost of borrowing will squeeze companies and consumers. That’s the theory, anyway. But it’s not supported by historical facts.
Interest rates an indicator of economic activity
Since the end of the last recession, interest rates have been abnormally low.
You knew at some point that they’d have to normalise.
And if you go back and study history it might surprise you what happens to stocks when the Fed does start raising rates.
You may come to realise that a few rate rises in 2018 might not be the seismic shock for the market that many seem to fear.
On the contrary, history suggests stocks usually rise alongside rates.
And it makes sense, because the Fed will only raise rates into a strengthening economy.
From mid-2004 to mid-2006, the Fed hiked rates 17 times, with US stocks climbing higher during that period.
So don’t get too lathered up by rising rates, especially if they’re coming off a low base, as is the case now.
Rising rates follow economic growth, and so this year is likely to be another strong year for stocks.
But looking at rates does give you some clues as to when you could expect an economic slowdown.
It takes on average about three and a half years from the start of Fed tightening before the US goes into a recession.
As the Fed began tightening in December 2015, that then gives us something to watch for in 2019.
And you’d probably be watching that date already if you knew about the real estate cycle.
When you understand the sequence and timing of the real estate cycle, you can know broadly what’s coming next for the economy.
That’s pure gold.
It’s not the stock market but the real estate cycle which is the underlying driver of the economy.
So far this real estate cycle is playing out no differently to previous cycles; in fact, it’s going exactly to script.
If you want to know what’s potentially coming next for the economy and how you might be able to profit from it, go here.
Lead Researcher, Cycles, Trends and Forecasts