With stock markets near all-time highs and economic data such as GDP and the unemployment rate looking rosy, many investors have been lulled into a false sense of security, believing that the economy is going strong and that they’ll continue to make gains well into the future. But that feeling is dangerous, as there are numerous issues lurking about that could upend markets and usher in another financial crisis. Investors who fail to pay attention to these issues could find themselves in a heap of trouble if they don’t take the necessary steps to guard against these potential problems.
1. Tariffs and Trade War
With so much of American industry dependent on international trade, the introduction of tariffs and the possibility of a long-term trade war could be incredibly disruptive to the economy. Companies that export their goods abroad will face difficulty in continuing their current sales due to the threat of retaliatory tariffs. And companies that have operations overseas or who produce outside the United States in order to import back to the US will now face tariffs from their own government.
All in all it’s a lose-lose proposition for American businesses, investors, and consumers. Businesses will see stunted growth, investors will see falling stock prices as business conditions deteriorate, and consumers will see increased prices across the board. The longer the tariffs remain in place and the more hardened these positions become, the worse it will be for investors.
2. International Political Upheaval
With the “War on Terror” having lasted already for nearly two decades, it’s easy to forget that the US military is still involved in numerous overseas conflicts, any of which could easily flash up into an all-out war. Given the saber rattling in Washington against Russia, deteriorating trade relations with China, and uncertainty on the Korean peninsula, there are numerous opportunities for swords to clash.
With the close proximity of US and Russian forces in Syria, a simple mistake there could easily lead to World War III. Tensions in the South China Sea could also lead to a major war between the US and China, particularly if China’s economy deteriorates due to tariffs and the Chinese government needs to find an outlet to focus the population’s anger and resentment. That would be catastrophic for world trade and world financial markets.
3. Political Turmoil in Washington
One thing that worries all investors is regime uncertainty. If you don’t know from one day to the next what the government will do, it’s almost impossible to do any sort of long-term planning for the future. And with the incessant political drama in Washington, it’s hard to tell who’s in control or what’s going on. With the publication of last week’s New York Times op-ed by an anonymous administration staffer, it’s clear that there’s a civil war going on behind the scenes in the White House.
For investors that makes it increasingly unclear what the direction of government policy will look like in the future. The President may say one thing but his staffers then work furiously to make sure that the government does exactly the opposite. That means at least two more years of uncertainty about trade and economy policy. And if the special counsel’s investigation ends up taking direct aim at the President, markets will undoubtedly react negatively.
Then there’s the prospect of Democrats taking control of Congress after this fall’s midterm elections, which markets won’t like either. With President Trump a wild card, Democratic moves to expand healthcare, raise the minimum wage, or increase taxes and regulations on businesses would unnerve markets as well.
4. Overvalued Stock Markets
While stock markets haven’t grown nearly as much over the past decade as they did during the 1980s and 1990s, they still are by all accounts incredibly overvalued. The stock market gains from early 2016 till today seem to have hit a snag this year, as there just aren’t that many great buying opportunities left. And with economic headwinds coming in the form of uncertain trade policy, rising interest rates, and a potential recession, it’s very likely that markets will decline in the near future. Anyone buying into markets today is buying at or near the very top of the bubble and is almost guaranteed to lose money over the next few years.
5. Housing Bubble
While the current housing bubble doesn’t get nearly the headlines that it did during the mid-2000s, it’s just as bubbly as previous bubbles. The prices of both houses and rent continue to far outpace the official inflation rate, making it more expensive than ever for Americans to buy a house or rent an apartment. And while many of the excesses of the last housing bubble disappeared for a while, they’re back now.
Low down payment mortgages resurfaced several years ago, and the number of mortgages originated by non-bank lenders is back to where it was before the financial crisis. With American households as indebted as or more indebted than they were before the financial crisis, this is creating yet another perfect storm as all these various factors combine. All it takes is one minor crisis to light the spark that could send the economy back into another full-blown financial crisis.
Investors who fail to take heed of these issues and protect their assets against them are destined to suffer just as investors who weren’t prepared for the last financial crisis did. Stock markets lost more than 50% of their value from 2007 to 2009, shattering the dreams of many a would-be retiree. If markets see similar losses the next time around, it would shake investors’ confidence in markets and ensure that millions of Americans would see their retirement plans dashed.
That’s why investors need to take the necessary steps right now to protect their portfolios against potential losses. Investors who put their money into precious metals such as gold saw their portfolios protected during the financial crisis, and they’ll see their portfolios protected in the future too. Because gold gained value while stocks declined, investors who had 30% of their investments placed in gold saw their portfolios retain 60% more value during the financial crisis compared to investors who remained 100% invested in stocks. And their portfolios continued to gain value as gold went on a tear after the financial crisis ended.
All indications are that gold will perform just as well during and after the next financial crisis as it did during the last financial crisis. And if that’s the case, investors who invest in gold now stand to reap the rewards. With a gold IRA investors can even roll over existing retirement funds into gold investments tax-free, gaining all the protective benefits of gold while still retaining the tax advantages of an IRA account. So if you’re worried about the future of your retirement funds, you owe it to yourself to look into investing in gold before markets start to decline.