By John Del Vecchio
I take Wall Street with a grain of salt.
After all, whether it’s research or advice, those folks are all about making money… for themselves.
They’re not looking out for the little guy. By the time the little guy knows the ship hit the iceberg and is sinking, Wall Street has padded its pockets. Joe Six-pack is scrambling for a life-vest.
And nobody does the time for their white-collar crimes.
However, once in a while, from that abyss comes a little gem that sheds interesting perspective on the market. That’s what I discovered in a recent release from Goldman Sachs…
And it’s a bright, red warning sign…
Take a look at this chart:
This aggregation of several indicators – including valuation, inflation, and the yield curve – shows that we’re in the danger zone. But we’re not in just any danger zone: We’re in a generational danger zone.
The market hasn’t been this risky on these measures since the late 1960s.
The beauty of this indicator is that it’s objective. There’s no fuzzy math.
We can make plenty of qualitative statements to justify why the line on the chart is where it is and that this time around it won’t amount to a hill of beans. Name the narrative: “Tax cuts”… “Buybacks”… “Divided government”… “Gridlock”… “War”… “Peace”…
Yada, yada, yada…
The fact is that risk is high. In the past, that’s meant zero returns going forward. Until the market corrects. Scary.
It is particularly scary this time around, because we’re dealing with a historical bull market. That means that the coming bear market – and there will be a bear market again – is likely to overshoot on the downside, too. There’s lots of excesses to work off.
So, what to do?
For one, pay attention. It’s been very easy to buy an index and make money in the market over the last 10 years. Even if you had your head in the clouds but suffered a momentary lapse of reason and bought an index fund, you’ve done well.
But more and more stocks are falling by the wayside – among them a few monster names that hold the market up these days. Indeed, even Amazon.com (Nasdaq: AMZN) and Netflix (Nasdaq: NFLX) got smoked in October.
That could be just a start.
Recent volatility is a warning sign.
There are more days in a bear market when the market is up 2% than in a bull market. Why?
Well, my own theory is that more people try to call “bottoms” than “tops.” It’s easier to buy the dip rather than add money into a blue sky high.
But the market has a perverse way of luring you in at just the wrong moment – usually after a few 2% “up” days – only to reverse course and pick your pocket.
So, it’s time to pay attention – real, close attention. Tighten your stops. And think long and hard about where and when to commit new capital.
Zero percent returns – which is what history tells us follows with markets at these type of levels – don’t sound attractive to me.
- As originally published in The Rich Investor