The Bear Market Countdown Has Officially Begun
The sell-off continues... 'Inversion' is here... The bear market countdown has officially begun... What history tells us about stocks and the economy now...
We'll begin today's Digest with a bit of housekeeping...
After months of hard work, we're excited to officially announce the release of the new and improved Stansberry Research mobile app. If you're looking for an easy way to keep up with all your subscriptions on the go, we encourage you to check it out.
Apple iPhone and iPad users can download it for free in the Apple App Store right here. Android users can download it in the Google Play store right here. Let us know what you think at feedback@stansberryresearch.com.
Well, we hope you've been paying attention...
For the past few weeks we've been warning you that the chances of a significant stock market sell-off were rising. And just two days ago, we told you that our colleague Dr. David "Doc" Eifrig was getting concerned, too.
While Doc is not yet predicting a recession or a serious bear market, he recently warned his subscribers that a double-digit correction could already be underway.
In short, he pointed to the 3% one-day decline in the S&P 500 last Monday. He noted that there have been only 19 declines of that magnitude during this entire 10-year bull market... And the vast majority of them occurred within a larger broad-market correction of 10% or more.
Unfortunately, Doc's prediction is already looking prescient...
The S&P 500 plunged nearly 3% again today. The latest bout of selling followed new worries about the U.S. Treasury "yield curve."
As longtime Digest readers know, we've been keeping an eye on the yield curve for nearly two years now. And the reason is simple... Whenever the yield curve has "inverted" – that is, whenever short-term interest rates have exceeded long-term rates – bear markets and recessions have inevitably followed.
In recent months, we've already seen some parts of the yield curve invert. However, the most widely followed measure – the difference (or "spread") between the yields on 10-year and two-year U.S. Treasury notes – had not yet done so.
In other words, while these moves were concerning, the most important recession and bear market "countdown" had not officially started.
Until today, that is...
This morning, the "2-10" spread fell to as low as -0.02% before recovering slightly...
This marks the first time this spread has inverted since the 2008-2009 financial crisis. According to history, the "clock" is now ticking.
Now, before you rush to sell all your stocks, take one more look at the chart...
The red stars indicate the last four bull market peaks in U.S. stocks. If you look closely, you'll notice that these peaks don't line up directly with each inversion. Like recessions, they tend to follow after a lag of at least several months.
For example, the last time the 2-10 spread inverted was December 27, 2005. But stocks didn't peak until nearly two years later... and the economy didn't officially fall into a recession until a couple months after that.
During the dot-com boom, the 2-10 first inverted in May 1998. But again, the real trouble didn't arrive until nearly two years later.
All told, there have been seven inversion cycles since 1965. According to Canaccord Genuity analyst Tony Dwyer, a recession didn't arrive until 19 months later on average. Stocks have peaked roughly 18.5 months later on average... and they've gained an average of more than 21% over that time.
Of course, that doesn't mean you should go 'all in' on stocks either...
While bull markets have typically continued well over a year after the yield curve inverts, there have been two notable exceptions.
In 1980, stocks peaked just two months after the yield curve inverted. And in 1973, the market actually peaked two months prior to the first inversion.
So while history suggests we should continue to give this long bull market the benefit of the doubt, we don't want to be careless. For now, our advice remains the same:
Stay long but hold plenty of cash and gold... if you have a large percentage of your portfolio in stocks, consider "hedging" with a few short sales or long put options... and keep a close eye on your trailing stops, just in case.
New 52-week highs (as of 8/13/19): Axis Capital (AXS), Leagold Mining (LMCNF), Lockheed Martin (LMT), Nuveen Municipal Value Fund (NUV), NVR (NVR), ResMed (RMD), Stryker (SYK), AT&T (T), and W.R. Berkley (WRB).
In the mailbag: Is this gold offer too good to be true? What can we do for you? As always, send your comments and questions to feedback@stansberryresearch.com.
"I saw an ad in AARP magazine saying they were selling 1/10 oz. American Eagle coins for $135 (ten for $1,350, plus $35 shipping). With gold at $1,500/oz., how can they do this?
"Is it worthwhile to buy from a company like this? I mean in general of course, not me specifically, as that would be [disallowed] personal advice." – Paid-up subscriber B.C.
Brill comment: We can't speak to the reputability of this particular dealer, but we do have a couple thoughts...
First, we suspect that those prices were published when gold was trading at lower prices. A quick search shows us most dealers are selling these same coins for $170 or more today. We suspect if you contacted this company, they would quote you a significantly higher price. If not, we would be suspicious.
Second, we'll remind you that gold and silver bullion is simply a commodity... Bullion is bullion. As such, you should try to pay the smallest premium over the actual price of the metal you possibly can. And typically, premiums are higher on smaller, fractional coins like the one you mentioned.
For example, while you're likely to pay more than $1,700 for 10 one-tenth ounce American Eagle coins (a roughly 15% premium over the actual price of gold today), you could buy a single one-ounce American Eagle coin for well under $1,600. Why pay more than you have to?
Regards,
Justin Brill
Baltimore, Maryland
August 14, 2019