Over the last couple months, I've noticed a bit of a change in the articles in Money Magazine and Kiplinger's. They've started to be more proactive in warning people about planning for an upcoming bear market.
And you know what? I understand why and agree with it.
Here are some of the red flags I've seen cited:
- Seventh Year of a Bull Market - We are in the seventh year of a bull market and they rarely last that long. It's not that we are "due" for a bear market, but... well yeah I'll say it, "We are due for a bear market." Why? Because...
- The Market Looks Expensive - Last June I asked if it was Time to Sell Your Stocks?... which should cast doubt on the validity of me asking the same question in the title today. If you read that article, you'd know about Shiller P/E and how a number over 25 seems to lead to crashes. Last year it was just over 25... now it is 27.42, which is what it was before the 2008-2009 crash. However, crashes typically need catalysts, so...
- Interest Rates Rising Soon - It seems that everyone agrees that the Fed is going to start raising interest rates. Typically this does not bode well for the stock market. Right now, there are few places where people can put money to work for them. Are you excited about earning a fraction of a percent in your savings account? If interest rates rise, other investments could look better. People could shift some money out of the market and into alternatives.
- Sell in May? - There's a theory that actually has significant statistical basis that one should sell stocks in May as they don't perform well from May to October in any given year. Whether there is legitimate causation or if it is just correlation is still a question of debate. My take is that it is a warning sign that shouldn't be ignored.
I'm not a big believer in market timing. If I had pulled all my money from the market and put it in cash last year, I'd have missed out on some significant gains. On the other hand, I see some value in taking some gains on any equities that you feel are "expensive" and holding in cash, or putting money in an under-performing area. I know I'll be looking to rebalance my portfolio.
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