Despite the stock market’s apparent recovery from its dismal start this year, the current rally is also accompanied by currency and economic risks which one respected financial voice says makes it the “classic investor trap.”
“It is not safe to jump all-in,” Med Jones, the president of International Institute of Management, a U.S.-based research and education organization, wrote for MarketWatch.
“At the International Institute of Management, our stock-market predictive model flashed a red alert in the second quarter of 2015, indicating a double-digit decline. If current central bank policies and financial market trends continue, we could see a severe market correction either in 2016 or 2017,” Jones wrote.
The S&P 500 has risen 15 percent since mid-February, when collapsing oil prices and worries about a slowing Chinese economy pressured stocks. Since then, oil has risen 65 percent to a high of about $43 a barrel on signs that oil-producing countries will agree to cut output. The Federal Reserve also indicated that interest-rate hikes will be gradual because of concerns about slowing economic growth.
“Many investors have the tendency to jump in a bit too early on first signs of improvement in economic indicators or positive news. But the markets are primed to trap the solvent investors and fool the most rational among us,” he explained.
“Nowadays, in a world of high-frequency trading and speculative derivatives, it is hard for even the most experienced investors to stay rational, let alone be clear on whether to buy or hold or sell. This is why so many experts on Wall Street are giving so much conflicting advice. Current forecasting science and predictive models are not yet developed enough to time the market for the next month or quarter,” he wrote.
He said while most investors have been distracted by China, oil prices, terrorism, Brexit, and the outcome of the U.S. presidential election, “few are paying enough attention to currency and derivative risks.”
For example, with all the preoccupation about just when the Federal Reserve will hike interest rates again, Jones asks: “But what if the Fed decides to cut interest rates instead? Then the risk of intensifying currency wars increases in order to compete for international exports. In price wars, be it oil or currency, the parties involved lose the most.”
Jones isn't alone in his warning to savvy investors about market dangers.
Star mutual-fund manager John Hussman, president of Hussman Investment Trust recently warned that stocks could lose half their value if the history of valuation cycles is any indication.
Repeating his call for a decline in the S&P 500 of 40 percent to 55 percent, Hussman says investors should also expect paltry total returns of 2 percent a year for next decade.
“From present valuations, a market loss of that magnitude would not be a worst-case scenario, but merely a run-of-the-mill completion of the current market cycle,” he writes in a recent commentary
. “Since the dividend yield on the S&P 500 exceeds 2 percent here, that also implies that we fully expect the S&P 500 Index to trade at a lower level in 10-12 years than it does today.”
(Newsmax wire services contributed to this report).
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