It has not finished

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

All of that was removed a week later. On Friday, February 2, the 3% run was stopped in its tracks 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 renewed growth prospects would force the Fed to raise rates more aggressively than announced. The following Monday’s 4.60% drop made it clear that what started as an organized outflow from high dividend yield stocks had turned into a market-wide stampede. It didn’t help that perfectly priced high flyers like Google and Apple had disappointing earnings reports.

The crash 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% at the time, and the worst point drop in Dow history at -1,175. The VIX index, which had been at 11.08, rose to 37.32. It could have been worse. The Dow fell 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 were rudely awakened. That quiet ride in the market wasn’t the new normal, but it may have been a fabulous break before the storm. So those entertained 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 far 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 spike in volatility is testimony to the paradigm shift with 1% more days, a rarity the previous year, occurring 48% of the time.

The causes of the emerging storm have little to do with our much-publicized rising national debt, the Federal Reserve’s high balance sheet, or the collapse of the dollar. The first two may come into play to some extent once the crash is underway, but we’ve been hearing about them for years with no success. 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.

Human beings go through life cycles and, when combined with demographics, help us predict future economic trends. Unfortunately, this combination is forecasting a steep spending shortfall that will have dire consequences on our economy and stock market. How big is the deficit? Approximately $686 billion in cumulative total from this year through 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 $1.5 trillion ten-year revenue cut from the Trump Tax Plan – The Tax Cuts and Jobs Act – and only slightly less than the $3.654 trillion the US government is projected to take. The US collects this year, according to the Office of Management and Budget.

Let’s put these figures in perspective. During the Great Recession, the federal government spent an estimated $3.40 trillion to stimulate the economy out of $614 billion in lost basic spending and about $1 trillion in real estate losses. Yes, you are reading it right. More than double the federal spending was needed 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 deal with this new deficit in the economy. That’s equal to 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 eclipse the financial crisis and last twice as long.

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