What happened last year.
What we're watching for
next year.
"You can't stop what's coming."
- from the movie No Country for Old Men
Every one of us knows, in our heart of hearts, that the good times never last forever. Some of us accept this fact and simply ride out the bad times, knowing that someday things will get better once again. Others prepare for the bad times and take defensive measures to mitigate the damage inflicted on our life savings by bear markets and recessions.
But there can be no doubt that another recession and another bear market are coming. And you can't stop what's coming.
There is no right way or wrong way to handle this eventuality. There is only the way you choose to handle it. I've had countless clients who claim, in the middle of a bull market, that they are buy & hold investors and they simply ride out the bear markets when they come. Easier said than done.
Every bear market that comes along is a test of the courage, determination, self-confidence, and discipline for investors. Many will crack under the pressure, and abandon their plan at the worst possible time. Others will stick to their plan and come out the other side battered but not broken.
Super-bears like we went through in 2000 and 2008 lead most investors to ask this existential question: "What if the market doesn't recover? What if the value of my life savings don't recover? What if this is just the start of a second Great Depression? Can I afford to wait 25 years to get back to even?"
To get some clarity about what's happening now and what the next year may look like, I return to my trusted indicators of what's going on under the surface of the headline numbers that get all the press attention.
Chart 1. S&P periodic returns.
However the market pundits want to spin it, the fact remains that this is an ugly market. Just look at the periodic returns. The only positive number is the Year-to-Date return, which only covers the period from 12/31/2018 until 1/4/2019. If that is enough to keep you optimistic, great. But I take a longer view, and what I see is massive damage that will take months if not years to repair.
Chart 2. Distance from Key Markers
The next chart reinforces what we saw previously - a market that is under attack by the sellers and seemingly unable to mount more than a two or three day rally before caving in again.
Chart 3 - chart of the week
This is the chart that gets my attention. The yield curve has been an excellent warning sign of economic weakness to come. It has not inverted yet, but it's getting uncomfortably close. When these two lines on the chart below finally cross, and they will, more aggressive defensive steps will be called for.
Final Thoughts
Things seem to be going from bad to worse in the market. I believe that we will see more rallies over the next few weeks and months, and some of them will probably be quite strong. But I'm less and less convinced that we will make a new high before we finally succumb to the next bear market.
I could be wrong, of course, but I follow my models and they are showing increasing risk and diminishing prospects for a new high.
For a full analysis of the probability of a bear market or a new recession, see my Monthly Intelligence Report.
As always, if you like what you see, or have suggestions for improving this recap, leave a comment below, or email me at info@zeninvestor.org