Ask a room full of British people what 1966 was famous for and there’ll be one answer that will outnumber any others…
England beating Germany to win the football World Cup.
It’s one of those bits of trivia that’s known by most people in the country of a certain age.
I know next to nothing about football. But even I could link that date with that event.
But you’re not here to read about football.
Forget the football – here’s why 1966 is important
Here at Monkey Darts, we’re all about markets.
And 1966 is important for something else.
According to John Authers in the Financial Times, today’s market conditions are eerily reminiscent of those in 1966.
And that doesn’t bode well for stock markets.
As Authers puts it, channelling Mark Twain, “History does not repeat itself… but it often rhymes.”
He reckons today’s low inflation… and the apparently never-ending stock market rally… echo what happened in 1966.
“The world of the mid-1960s may not seem very similar to today, but then as now, stock markets had recently had a period of exceptional calm (1964 was the only year in history even less volatile than 2017 on the US stock market), and had enjoyed a prolonged rally. American and European society were churned by the radicalism of the Sixties, which would culminate in the unrest of 1968…
“The important parallel: inflation. After years of inflationary spending to finance President Johnson’s social programmes and the war in Vietnam, inflation began to awake from its slumber… As inflation rose, so bond yields also began to rise, and equities began sliding into a bear market that would last the entire length of the 1970s… In real terms, the S&P stalled in early 1966, made a slightly higher peak in 1968, before tanking – it would drop by almost two-thirds before hitting bottom in 1982.”
Low inflation, rising stocks, followed by rising inflation, rising bond yields… and stock market crash!
That’s the scenario.
So, what about Authers’s parallel with today’s market?
Nine years of easy money
Interest rates have been near historic lows for years.
Ever since the Federal Reserve and other central banks slashed them in response to the Global Financial Crisis of 2007/8.
The aim was to fight the threat of deflation. And to jolt the sickly global economy back into life.
So central banks chucked everything they could at the problem.
In the US, the Fed cut interest rates from over 5 percent to zero in just over a year.
Other central banks including the Bank of England and the European Central Bank joined in.
The aim? To encourage lending and get the economy moving.
They even tried negative interest rates.
That meant that it cost businesses and people to hoard money. Rather than earning interest on your savings, you effectively paid your bank to hold your money!
Of course, the idea was that they’d stop saving and start spending. Which would be inflationary and good for the economy.
And central banks also printed trillions of dollars in stimulus programmes (quantitative easing).
With the money they created through QE, they bought bonds and other assets, effectively pumping money into the financial system.
All these things the Fed and other central banks did were to promote growth in the economy and lift inflation.
Did it work?
Well it certainly lit a roaring fire underneath asset prices.
The stock market bottomed in March 2009 and has been rising ever since.
You’ve seen the headlines. We’ve mentioned them in Monkey Darts enough times.
Markets have been hitting new all-time highs week after week.
And that’s meant it’s been a cracking time to be invested in the stock market.
OK, I know that in the past year or so, people have come to expect larger returns, thanks to the cryptocurrency space. (More on cryptos a bit later in this issue…)
But as far as shares go, the past nine years have been impressive. It’s been dead easy to make money from stocks.
Look at the US benchmark index (the S&P 500). It’s returned an impressive 368% (including dividends) since the market bottomed in March 2009.
The FTSE has more than doubled without dividends. Add dividends in, and it’s probably getting a lot closer to what the US market has returned. (I couldn’t find an exact return including dividends.)
The fact is, stock markets have been on a roll for the past nine years… with the strong wind of central bank stimulus at their back.
But what happens when you take all that wind out of the sails?
Hmmmm.
Well that could be what we’re about to find out…
Here’s what could spook the markets
In the US, rates have been rising gradually since December 2015.
And markets have coped well with that.
Markets really don’t mind gently rising rates. Not if they’re expecting it. After all, the message from the Fed is that it must mean things are rosy.
But what happens if inflation starts to rise more rapidly (as there are signs now appearing) and the Fed gets more aggressive (larger or more frequent rate hikes)?
Have you seen the oil price lately? It’s nudging $66 a barrel on the WTI (US crude) market. That’s up 57% from $42 last summer.
With soaring prices like that, its no wonder expectations for inflation are on the up! I mean you can feel it at the pump, right?
And it’s not just oil. The Bloomberg Commodity Index is at 12-month highs, with more rising prices expected in 2018.
The higher the inflation (or the expectation of it), the greater the chances the Fed will raise rates.
That’s what could cause the problem.
That’s when investors could get spooked.
That’s when we could get the kind of 1966 parallel that John Authers alludes to in the FT.
You may have seen it seeping into the news – talk of a ‘reversal’ in the huge and powerful bond market.
If you haven’t, expect to see it more in the weeks ahead.
And it could have an impact on the stock market – something to think about if you’re loaded up with stocks.
The FT is on the case:
“The US government bond sell-off deepened on Thursday afternoon, lifting the 10-year Treasury yield to a fresh four-year high and weighing further on stock markets.
“Bond markets have come under rising pressure this year as rising optimism over the strength of the global economy has fuelled expectations that inflationary pressures are building.
“The 10-year Treasury yield has climbed steadily from 2.4 per cent at the start of 2018, and on Thursday rose another 8 basis points — the biggest jump in more than a year — to 2.79 per cent. The rise in the yield to the highest since April 2014 stoked concerns that a three-decade bull run for bonds may be over.”
And where long-term interest rates (bond yields) go, short-term rates (the Fed base rate) go, too.
On Wednesday, Janet Yellen handed the reins of the Fed over to her replacement, Jerome Powell.
She didn’t do anything rash like hike rates again before rushing out of the door.
But as the FT notes, her “relatively confident accompanying statement reinforced expectations that policymakers will tighten policy in March (i.e. raise rates – Alex) and perhaps move more aggressively than previously forecast later this year.”
That’s what you need to be wary of if you’re riding the stock bull market… an aggressive move higher in rates…
After a long period of low inflation, low rates and ever rising stock markets, we could be in for a 1966-style shock to the system.
Or perhaps even worse…
Black Monday-style crash on the cards?
John Authers also talks about another echo from the past in his FT piece – that of October 1987…
“Everyone knows what happened on Black Monday in October of this year (1987), so this is an alarming parallel. The commonalities: stocks had hit bottom five years earlier, but it was only in early 1987 that true optimism took hold and equities began melting upwards.
“This is not unlike today. Financial engineering, in the form of junk bonds and mortgage-backed bonds, was booming, and it is again. Then as now there was a new and untried chairman at the Fed, after a questionable decision not to give the job back to the incumbent. Then as now the US Treasury Secretary (James Baker) spoke aggressively about forcing down the value of the dollar, while the president (Ronald Reagan) asserted that a strong dollar was good.”
(Sound familiar? In last week’s Monkey Darts, we saw how the current Treasury Secretary, Steven Mnuchin, was talking down the dollar while Trump was calling for a strong dollar!)
Back then in 1987, the stock market was surging as bond yields started to rise. But then it all came crashing down.
“The potential for a crash is there,” John Authers concludes, “but it would need a scare in the bond market to trigger it.”
Is that what’s coming? There’s talk about it in some of the research that’s been hitting my inbox lately. Perhaps you’ve seen it yourself.
We could be reaching breaking point.
Be prepared
Of course, you can’t time these things.
If we could figure out exactly when this stock market crash is going to happen, we’d be sorted wouldn’t we?!
But you’ll never pinpoint the exact top or bottom of a market. So, it’s pointless trying.
The best we can do is to try to prepare a little.
You can take steps to preserve your capital if you’re worried the market may be prone to a sell-off.
Perhaps take a bit of profit from anything that’s looking over valued.
And you could keep some cash in reserve for when the big sell-off comes… and prepare to go bargain hunting.
If there’s something you’ve been itching to get your hands on, but you want it at a better price… you could soon get your chance.
Make a wish list now and keep a war chest ready to buy when the time is right.
Even switch some of your portfolio into assets that tend to do well in an inflationary environment and when other markets are falling.
Commodities like gold and silver are good examples (check out our free silver report here). If the stock markets get smashed, expect these two to move higher.
Crypto correction continues
Whilst we’re anticipating a correction at some point in the stock market, in the crypto space the correction is happening right now.
For anyone waiting to get in to Bitcoin or other cryptos at a lower price, you’re getting your chance now.
Six weeks ago, Bitcoin was trading at $19,000. Today it’s around $8,000.
When you look at it like that, it’s a better price to be buying at today.
The question is, how far will these markets fall.
It’s a hard one.
If you managed to get a place at the Crypto Traders’ Academy when they opened the doors last week, check out their latest analysis from yesterday.
(Doors are closed right now, but you can join the waiting list here.)
They’ve done a great job of looking at the charts for Bitcoin and giving potential scenarios for where the price is heading now. I can’t share that in detail here as it’s for their members only.
But the message from those crypto experts is clear: the long-term bull case for Bitcoin and the crypto market in general is intact.
This is a correction and they are looking at it as a major opportunity. They’ll be guiding their members on how to play it in the weeks ahead.
The thing to remember about the crypto market is that it’s no different from any other market.
It’s the same as investing in shares. Or in property. Or in art, wine or collectibles.
Prices go up and down.
The goal with any investment or speculation is to sell what you’ve bought for a higher price than you paid.
But along the way, chances are you’ll experience periods when you are down on the deal. That’s how markets work.
So long as you stick to the rules, then you can’t get hurt.
What is the number 1 rule?
Don’t invest more than you can afford to lose.
With that in mind, if you’re looking to get into cryptos and want some guidance, get your name on the Crypto Traders’ Academy waiting list.
I’m not sure when they’ll have a space for you. But if your name is on the list, you’ll get first shout when there’s a place available. Register here.
I’ll be back next Friday – have a great weekend.
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