The Market Is Ending the Year on a Roller Coaster… What Does 2019 Hold?Trevor Gerszt
The actions of stock markets over the past several months have likely contributed to a number of near heart attacks among anxious investors. With unprecedented volatility roiling markets, they’re just as likely to end a trading day down 600 points as they are to end up 600 points. And with the trend tending ever downwards and well off all-time highs, investors are wondering just what markets are going to do in 2019. Here are some of the scenarios that might face markets and how likely each is to occur.
1. Markets Are Bottoming Out and Will Head Upward
Markets had gotten so high in recent months that we saw a return of the late 1990s attitudes that stock markets were going to continue reaching sky-high. And with a double peak in 2018, with market highs being reached both at the beginning of the year and in the fall, it’s understandable that optimistic investors think that markets will rebound from the current losses and continue climbing. But when you look at the future of the economy, what is going on that could support that view?
The trade conflict with China is a major headwind that is already weighing on the growth of numerous companies. Employment figures seem to be good but wage growth remains slow. Inflation is starting to pick up again. And interest rates will continue to rise over the next year, putting pressure on both consumers and businesses. With companies and households at record levels of indebtedness, that bodes poorly for the future.
Yes, we all would like to think that the economy is going strong and has recovered from the ravages of the financial crisis. But the reality is that the future is looking very uncertain. Investors can’t look at the economy with rose-colored glasses anymore. They need to understand that stock markets are set to take a major tumble and should adjust their investment strategies and portfolios accordingly.
2. We’re In the Middle of a Bear Market
Technically stock markets enter a bear market when they’re down 20% from their all-time highs. Normally that takes several months to occur, but this bear market has taken only about three months to develop. But while stocks may be in the middle of a bear market, the rest of the economy has yet to follow.
That will happen eventually, as it did in 2008 when the economy tanked after stock markets did, but we’re not there yet. The headwinds are evident but no one knows which sector of the economy will crack first. Will it be the manufacturing sector, hit hard by Chinese tariffs? Will it be the housing sector, as rising interest rates and sky-high prices push consumer demand to a minimum? Or will it be the financial sector, which didn’t learn the lessons from the last crisis and remains oblivious to the dangers of excessive leverage?
At this point it’s anyone’s guess as to how the next crisis will unfold. What’s certain is that it will occur and we have yet to see the worst of it. What we’re seeing right now in stock markets is the prelude. After this little bout of weakness will come the deluge. Stocks are leading the way and flashing all the warning signs that investors should heed if they want to keep their assets safe.
3. The Worst Is Yet to Come
As much as many people may not want to believe it, we’re not anywhere close to the worst part of the next financial crisis yet. We’re still in that stage in-between the first warnings that things might not be going so well and the realization on the part of everyone that the economy is tanking. There’s still a long way to go before the next financial crisis fully develops, so we haven’t seen anything yet. While markets may drop thousands of points in only a few weeks right now, we’re going to continue to see further drops in the future. There may be significant daily upswings too, but the trend will continue downward.
This is the time in which investors need to take stock of their strategies and portfolios and start thinking about how to preserve and maintain their wealth. Many prognosticators had been warning since the beginning of the year that stocks were overheated and due for a major correction. The correction has occurred, but further slides are in the cards.
Stock markets lost over half their value during the 2008 crisis and could lose just as much or more this time around too. Imagine the Dow dropping back to 13,000 points, 10,000 points, or even lower. A decade worth of gains would have been wiped out in the span of just a few months, and stock markets could go back to levels they first reached in the 1990s.
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Contrast that to gold, which gained 25% during the time that stock markets were tanking from 2007 to 2009 and continued rising even after that. Gold has acted as a safe haven for centuries, as its rock solid ability to maintain its value in the face of financial turmoil and economic distress has made it an asset beloved by investors. And gold will continue to be in demand by investors when the next financial crisis occurs. Investors who are serious about protecting their assets and minimizing their losses during the next financial crisis need to start thinking about investing in gold if they want to keep their savings as intact as possible.