Seldom before have forward return possibilities been so bifurcated, asserts James Stack, a leading value-oriented money manager, market historian and editor of InvesTech Research.

Speculators believe that Fed easing will save the economy and future returns will remain strong. Yet evidence suggests the economic slowdown or downturn may prove deeper than many realize.

One of our immediate concerns is the possibility of the Fed’s well-intentioned actions inflating a financial asset bubble in stocks or an overheated housing market — or both.

There’s an age-old truism on Wall Street that the most dangerous words for investors to think or use is “This time it’s different.” Often attributed to Sir John Templeton, legendary stock picker and founder of the Templeton Funds, the danger of these words has rung true time and time again throughout history.

In the late ’60s, it was the Go-Go Fund Era that ended badly when everyone learned that newly formed aggressive growth funds do not grow to the sky.

In the early ’70s, there were the one-decision Nifty-Fifty stocks that an investor could buy and hold forever… not! Of course, the late ’90s saw the Tech Boom Bubble and subsequent deflating of the New Paradigm hype and hopes.

Today’s danger lies in the complacent confidence that investors and consumers alike are placing in their extrapolation of this longest bull market and oldest economic expansion in U.S. history.

Even with late-cycle evidence, and emerging signs of economic slowing, the widely held belief is that the Federal Reserve has full control of the situation and a recession can easily be avoided with rate cuts.

The Federal Reserve was compelled to temporarily ease after the collapse of Long-Term Capital Management (LTCM) in 1998, but then had to tighten again as the Tech Bubble reinflated to new heights.

In 2000, as early evidence of an impending recession unfolded, the Fed started a course of aggressive easing. Yet, in spite of numerous rate cuts over many months, the Federal Reserve was unable to prevent the recession from taking hold and running its course.

This Fed-induced false sense of security was even more apparent in 2007, right before the Financial Crisis. Despite 10 additional rate cuts over the course of the 2008 bear market, investors sustained substantial losses with a 57% decline in the S&P 500 Index.

Navigating the risks of a late-stage bull market requires a patient and diligent approach. The technical data is mixed, and there are signs that the economy is slowing. The market has risen to new highs, but the probability of recession in the next 12 months has reached a troubling level.

When times are tenuous, gold and gold mining stocks have historically provided excellent portfolio diversification. The calculation is rather complex, but it essentially measures changes in momentum, giving a buy signal at points when it turns decisively upward from a negative reading.

Although false signals do occur, this indicator has helped identify some of the most favorable gold investment opportunities of the past 43 years. Based on these promising conditions, we incrementally increased our gold ETF position — VanEck Vectors Gold Miners (GDX).

If the Fed is successful at spurring a resurgence in economic growth and a new bull market, we should see confirming evidence in key technical and macroeconomic indicators. Conversely, if recessionary evidence continues to mount, which we feel is more likely at this time, we are prepared to adjust our allocation accordingly.

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