Sunday, September 8, 2019

The Next Bear Market Could be Worse than 2008

No one knows when the next bear market will occur, but as you may know, the yield curve recently inverted. Historically, every single bear market over the last 50 years has been preceded by an inverted yield curve, so it's a very strong indicator. When the curve does come before a bear market, the market usually drops a year later on average. Though every bear market has been preceded by an inverted yield curve, every inverted yield curve has not signaled a bear market.

Why do I believe this bear market could be a bad one? According to a May 2019 report by the Federal Reserve, tens of millions of American families are on the edge of economic oblivion based on the following:
  • Many families struggle to save for retirement and unexpected expenses. In fact, 39% of the 11,000 adults surveyed would have to either borrow or sell something to cover a $400 emergency.
  • Three in ten adults experience financial strain due to family income that varies from month to month, and one in ten struggled to pay their bills at some point in the prior year because of those changes in income.
  • Many survey respondents—particularly young adults—need financial support from family or friends to make ends meet.
  • One in four adults have no retirement savings or pension.
  • In the years since the Great Recession, student debt has exploded from $500 billion to $1.6 trillion.
  • Non-housing related debt has climbed from $2.65 trillion in 2008 to more than $4 trillion by the second quarter of this year.
  • A record number of Americans (7 million) are or have been at least 90 days late for their car payments.
I’m also concerned by a Pew Center report that says that more Americans are living month-to-month in rental housing than at any time in the last fifty years. Why is this an issue? In times of trouble, people often rely upon home ownership to help them out, by borrowing against home equity loans, etc. That assistance won’t be there for renters.

And it’s not just individuals who have massed mountains of debt—it’s countries, including ours. If incomes drop, and people (and/or countries) default on their debts, we could be in for big economic trouble.

Are you prepared for an event like that? Do you have a plan that addresses the potential for a bear market? I strongly believe you should.

Have a strategy to get out of the market, especially if your close to retirement, or currently retired. One such strategy, while not perfect, is to sell when the market index (such as the S&P 500) moves 2 or 3 percent below it's 200-day moving average. The chart below uses this strategy. It is not perfect -- no system is -- but it can help you avoid large losses to your portfolio.

What's more important is to design a strategy now. Protect your principle and do not suffer huge losses.

Note: I learned of this strategy from Ken Moraif, from Retirement Planners of America. Much of this article was written by Ken.

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