We have reached a critical juncture in the global economy.
First, let me give you the background on why we are at a critical juncture then I will explain what it means for you in a challenging global market environment. You don’t need to understand all of my underlying logic, though I am including some of my analysis here for your reference if you are interested.
I have always enjoyed studying economics, investing, and was a business finance major at my university. I have been quite successful with my own stock and bond investments. My disclaimer here though is that no one can really time markets, even Warren Buffet and Benjamin Graham will say that. For the last two years, I have believed that the long bull run in the global economy has turned into a bubble. I sold all of my stocks and have turned to investments that I believe will better weather a recessionary / inflationary environment. My timing has been off as the stock market has gone up another 50%, but I don’t believe there is anything sustaining the current overheated stock market in the US.
We are currently in the longest bull run in US history for the stock market. Business has run in cycles for the last century and this is the longest upcycle we’ve seen. I believe this upcycle is no longer supported by genuine underlying growth in trade and is instead just floating on investor optimism.
One indicator that has been fairly reliable in the past is what is called an inverted yield curve on bonds. In simple terms, an inverted yield curve is when the US short term bonds pay a higher interest than US long term bonds. This is a violation of basic economic common sense usually since people want to be paid more money if they are going to lock up their money long term. However, if investors are afraid of long term economic prospects, they will want the safety of long term bonds and will be willing to accept less money. For the first time since 2007, the bond yield curve inverted today.
Another indicator I watch closely is price to sales of the S&P 500. This is basically the difference between the revenues and the market capitalization of the 500 biggest companies in the US. This reached an all time high recently… meaning that the stock market value of these stocks is not really justified by their revenues. In my opinion, only positive thinking supports the current market high and when people start getting scared a crash will happen.
A highly respected indicator in the market is the S&P 500 PE ratio. This is the difference between the profits and market value of the 500 largest companies in the US. Currently this is as high as it’s been previously back through the late 1800’s. When it’s reached similar levels previously, generally a crash and recession have followed. Notice the previous peaks corresponding to the recessions in the 1920s, 70’s, late 80’s and late 1990’s, and the most recent crash in 2007.
Further, a number of soft factors indicate possible recession. These include the rise of populist / nationalist leaders in many countries who are shutting down trade between countries and damaging global supply chains. This will greatly increase the costs of doing business around the world. It appears that every large economy in the world outside of the US is now in contraction and the US may soon follow.
So what does all this mean on a global scale?
We are likely to see the global economy slow down or even go into recession. I am not sure when, it could start this week or it could be in the next year or two. When this happens, companies all over the world typically freeze new hiring and lay off newly hired people. Coalition will do neither. Many poorly run companies will go bankrupt and people will panic. However, just as the upcycle comes to an end, the downcycle will too. Global GDP will continue to rise over the long term as technology continues it’s rapid advance. Companies that make smart decisions now will gain a major advantage in the future.
What can you do personally?
What you should do personally will vary greatly depending on your personal circumstances. Advice that will help you broadly is that you should make sure you have a written personal budget, that you are saving & investing money each month in safe places, build healthy habits, pay off high interest debt first, and remember to enjoy life.