It has not finished

Amid the current market volatility, it’s easy to forget that we enjoyed record profits and calm seas in January. Back then, on Friday, January 26, the stock market was on track to break the all-time record for the longest streak without a 5% decline set in 1959. It would have been a deal closed later in February. In October, the S&P 500 eclipsed the record for consecutive days without a 3% drop, and it accumulated with each passing day. Volatility, as measured by the VIX index, had recently hit record lows. The average market open/close difference had been 0.3%, the lowest since 1965. What could disturb this unexpected sea of ​​calm? Plenty!

All of that was removed a week later. On Friday, February 2, the 3% streak was stopped dead when the market fell 3.93% below the intraday high reached on January 26. the fastest pace since the recession, there was widespread fear that the renewed growth outlook would force the Fed to raise rates more aggressively than announced. The 4.60% drop the following Monday made it clear that what started as an organized run out of high-dividend-yielding stocks had turned into a stampede for the entire market. It didn’t help that price-perfect high flyers like Google and Apple had disappointing earnings reports.

The fall on February 5 ended the market’s search for the longest streak without a 5% drop. It was the worst drop since August 8, 2011, 4.62% back then, and the worst point drop in Dow Jones history at -1175. The VIX index, which had been at 11.08, rose to 37.32. It could have been worse. The Dow went as low as 1,597 points by mid-afternoon. Two weeks after the market closed in record territory, it went through a correction.

Those who had been lulled into complacency had a rude awakening. That quiet ride to the market wasn’t the new normal, but it may have been a terrific break before the storm. So those entertaining dipping back into the market might want to put that off. Despite the recovery since then, what started as a knee-jerk reaction to rapidly rising bond yields may turn into something much more dire. Indeed, a financial storm is brewing, and like the previous record calm, it will be of historic proportions. What we have witnessed so far are only the first labor pains. The recent rise in volatility is testament to the paradigm shift with 1% more days, a rarity last year, occurring 48% of the time.

The causes of the emerging storm have little to do with our much-publicized rising national debt, high Federal Reserve balance sheet, or collapsing dollar. The first two may come into play to some degree once the crash is underway, but we’ve been hearing about them for years to no avail. The third is unlikely to materialize. No, the forces involved are more tangible, certain, and have a more predictable timeline. Its effect will manifest itself in the market soon. Of course, soon is relative.

Humans go through life cycles, and when combined with demographics, they help us predict future economic trends. Unfortunately, this combination is forecasting a steep spending deficit that will have dire consequences for our economy and stock market. How big is the deficit? Approximately $686 billion cumulative total from this year to 2023. We all know that every dollar spent is multiplied many times over in our economy. This is what we call the velocity of money. When that is factored in, the figure is at least $3.43 trillion. Oh! That’s more than double the ten-year revenue reduction, $1.5 trillion, from the Trump Tax Plan – The Tax Cuts and Jobs Act – and just slightly less than the $3.654 trillion the US government is projected to The US is collecting this year, according to the Office of Management and Budget.

Let’s put these numbers in perspective. During the Great Recession, the federal government spent approximately $3.40 trillion to stimulate the economy of $614 billion in lost basic spending and about $1 trillion in lost real estate. Yes, you are reading it right. It took more than double federal spending to offset consumer losses in spending and real estate. And such inefficiency is normal. Given the same multiplier, a government package of $7.22 trillion will be needed to address this new deficit in the economy. That’s the equivalent of two years of individual income taxes, corporate taxes, and Social Security and Medicare taxes combined! If that’s the size of the package, imagine the size of the financial storm. It will dwarf the financial crisis and last twice as long.

If you are invested in the stock market, your portfolio will take a hit. Therefore, it would be prudent to make changes to future allocations and start limiting your exposure to stocks now. Many will label me irresponsible, but when what I predict comes to pass, you’ll want to be out of the stock market entirely.