Forecasting the financial markets can be tricky, but it’s a key part of a financial adviser’s job.
If you saw “The Income Generation’s” 2019 market recap show, you know that 2019 served up a virtual funhouse of surprises in the financial markets — and not all of them were fun.
Heading into 2019, I forecast that the Fed would approve no more than one interest rate hike. I knew this because the bond market had finally put its foot down in December of 2018, which meant bond yields would no longer be able to rise each time the Fed announced its intent to raise short-term rates.
This, in turn, meant the Fed couldn’t keep raising short-term rates without further flattening the yield curve. As a result, I forecast a possible market pullback and economic slowdown in 2019.
What I didn’t envision was that the Fed would take steps that would further flatten the yield curve. That’s what happened in March when the Fed announced it would discontinue the unwinding of quantitative easing (QE). That announcement ended up pushing bond values up and long-term interest rates down — forcing the Fed to cut short-term rates three times in 2019.
I also didn’t envision that with the yield curve nearly flat, the Fed would start buying back U.S. treasuries again — essentially launching another round of QE. That occurred in response to the banking system’s September liquidity crunch. Since October, the Fed’s ongoing “overnight repos” have injected hundreds of billions of dollars into the repo market.
So, what does all of this mean for the markets in 2020?
To me, it’s a clear sign that the Fed plans on doing everything within its power to keep the stock market elevated and to delay the next recession and major market correction.
Historically, a recession typically hits 12 to 18 months after the yield curve flattens or inverts. Since the yield curve inverted in July of 2019, we’d normally see a recession around August 2020 or early 2021.
However, with the Fed clearly committed to doing everything it can to alter the markets’ natural course, it’s likely the reckoning could occur later. With that in mind, it is possible we could see another 10 to 20% market increase.
Of course, that could all change very quickly depending on what happens with the impeachment issue and escalating tensions in the Middle East.
However, you should ask yourself: “Is this stock market real, and, if not, do I really want to gamble my financial future on something artificial?”
If you’re retired, or near retirement, the answer seems obvious. That’s because, even if the market does add another 20%, history suggests that the next major correction could mean a drop of 40% to 70%. It’s like going to a casino and playing a game where, if you win you get $20, but if you lose you have to hand over $70.
Retirees and those near retirement simply can’t afford to make that kind of gamble with their retirement future. That’s why I believe it’s important to continue making financial defense your number one financial priority in 2020.
If you’re interested in learning more about how to protect your retirement savings from economic uncertainties, visit The RetirmementIncomeStore.com to sign up for a complimentary three-month trial subscription to The Retirement Income Store® Newsletter.
David J. Scranton, CLU, ChFC, CFP, CFA, MSFS, is a nationally renowned Money Manager, Amazon Bestselling Author, national TV Host of The Income Generation, Founder of Sound Income Strategies, LLC, The Retirement Income Store®, and Advisors’ Academy. With over 30 years of experience in the industry, Dave specializes in income-generating savings and investment strategies.
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