Over the past 120 years, the U.S. has spent 29% of this time in a recession. But in recent decades, the economy has only been in a recession 14% of the time, so they haven’t been that common, observes Mary Anne and Pamela Aden, editors of The Aden Forecast.
In fact, we can all likely remember the past three recessions because they stand out... the 2000 recession following the bursting of the dot-com bubble, the financial crisis of 2008 and the pandemic recession last year.
But overall, recessions are a recurring reality. As a matter of fact, with the stock market super overvalued and due for a decline, it too is signaling that we may see a recession sooner rather than later.
Time will soon tell but if so, it would then be very bullish for bonds. But what about gold? It’s bullish too and it’s set to head higher. Yes, and you’ll remember that bonds and gold have generally moved together for quite a while.
They’ve been the ultimate safe havens and they often move in lock-step, especially during times of stagflation. Stagflation happens when growth is slow, combined with inflation. And that could also be what’s in store for the second half of this year.
Note, fueled by the biggest central bank stimulus ever, most markets surged in the inflationary environment we’ve been living in. That went for stocks, commodities, oil, real estate, natural resources, metals, currencies, cryptocurrencies, digital art and just about anything else you can think of, except for bonds. It was basically a wild and crazy time.
But it now looks like things are going to sober up with bonds taking the lead. This in turn will affect all of the markets as well, and the second half of this year will probably look a lot different from the first half. If bonds, for instance, take center stage, stocks will likely head south. The same would probably be true of the U.S. dollar.
Suddenly, everyones feeling getting worried that a covid resurgence could abruptly slow the world economy. Obviously, this would be a big disappointment to all, and it would likely wreak havoc on sentiment. This in turn would be very bearish for stocks, and perhaps this will end up being the trigger we discussed last month.
Of course, we don’t yet know, but the ingredients are there and we’ll have to see how this unfolds. But there are more ingredients and another big one is the “little guy.” This syndrome may sound funny but it’s very real.
The little guy is generally a new, inexperienced investor. As a group, they tend to buy stocks at the end of major bull markets. And that’s been happening this year.
Investors have been pouring into stocks at record rates and they now have the most money in the stock market ever. In fact, more than 10 million new brokerage accounts have been opened so far this year.
These investors are optimistic, and they’ve also been buying a lot of risky stocks and borrowing record amounts of money to do so. Again, these are important signs of a top.
If we look at stocks compared to gold, and stocks compared to bonds, these two ratios are telling us the same thing. In both cases, the Dow has risen too far, too fast and they’re due for a downward correction. And when they do decline, they’ll be weaker than gold and bonds.
In other words, gold and bonds are set to outperform stocks, so that’s where your focus should be. This means some adjustments will have to be made to your portfolio, starting now.
We feel there are too many factors pointing to lower stock prices ahead. That goes for the global stock markets too. So if you’re still in stocks, our best advice is to be cautious and be quick to lighten up on stocks at the first signs of trouble. We’re still recommending a small 10% position in stocks, but we may be selling these soon.
For the first time in a good while we currently recommend buying some U.S. government bonds. This is a big change compared to before, but it’s clearly warranted. The point is the story is unfolding and we have to be flexible.
Long-term U.S. government bonds are set to rise further and it looks like they’ll be outperforming some of the other markets. They are signaling a buy and we think it’s worthwhile.
If you’d rather buy a bond ETF, then the one we like best is iShares 20 Plus Year Treasury Bond ETF (TLT) which seeks to track the investment results of an index composed of U.S. Treasury bonds with remaining maturities greater than twenty years.