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Recession Signals? Here's One

While everyone is watching bond yields, the S&P 500 is carving out a familiar pattern

Wall Street pundits are suddenly freaking out about recession. Their main concern stems from what happened in the bond market last week. Namely, the yield on 10-year U.S. Treasuries falling below that of 2-year U.S. Treasuries. This is called an “inverted yield curve.” Whatever, right?That’s just a detail. I prefer to focus your attention on what is actually happening. That is, not on TV, not from politicians, and not from your friend or family member who works for a big brokerage firm. I want to try to tip you off. Specifically, I aim to point out things that actually matter to your money at a time when it is easy to lose your marbles over this stuff.After all, all of this hype over the goings-on in the bond market are just the latest, little piece of evidence that things are not as they have been. That, in turn, is filtering down to the mainstream media. That trickles down to consumers, who do what they should do. They personalize it to their own situation. The toughest part for them is deciding what, if anything to do about it.

You are now entering the jargon-free zone

I have counseled investors of all types for three decades. And, while this writing forum is not a place where I can provide personalized advice, I am going to follow through on what I told you I would do in my last article. To be blunt, get away from the jargon and hype of financial media, simplify your approach, and take a straightforward path toward preserving capital in a time of uncommon threats to your wealth.I plan to write to you frequently over the next several months. My aim is to give you an ongoing, timely narrative of what I see after literally over 100,000 hours of doing this for a living (yes, I did the math).

What is taking shape in the stock market

Let’s start with a critical concept: no one knows for sure what will happen in the markets. It is a constant calibration of reward potential versus potential for major loss. What is major loss? Everyone’s answer is different.Here is what I see in the current stock market. There is a slim but realistic chance that the S&P 500 will do what it did late last year: scare you for a little while, then continue on its upward path that started way back in March of 2009.However, there is a strong chance that something else will happen. The market will continue its process of topping out. The U.S. economy will join the rest of the globe in entering a recession.The stock market used to be known as a place where you could see what would likely happen to the economy about 6 months from now. That is, it was a “leading indicator.” However, in an era of instant information, Presidential tweets, immediate gratification, and stock market algorithms, that 6 month figure is probably shortening as we speak.

Does the S&P 500 have dandruff?

Below you see the path of the S&P 500 Index since shortly before the 2016 U.S. Presidential election. It ran higher, pulled back sharply in early 2018, and again in late 2018. Then, 2019 was all bliss, at least for several months. The market is up over 15% this year…after falling over 15% in 3 weeks last December.Focus on the far right side of the first chart below. This is the part that gets my attention. The last four months have seen a rally, a pullback, a rally to new all-time highs, followed by another pullback this month. This week’s “bounce” higher might lead to new highs. But if it stalls and the decline continues, it could form a pretty straightforward chart pattern known as a “head and shoulders.” That is not like the shampoo…though I have been called a “flake” by some. But I digress.Again, don’t worry about the jargon, concern yourself with what that does to your retirement path if it happens.

Not the first time

For comparison, here is the S&P 500 leading up to the start of the Financial Crisis a decade ago. We all remember “2008 – terrible year for the stock market.” But it all started in early 2007, with the collapse of a legendary Wall Street firm, Bear Stearns. Toward the end of 2007, a pattern similar to one I pointed out above was starting. What happened in 2008? Well, you know.Finally, here is the famous Dot-Com Bubble, as portrayed by the price of the S&P 500. Again, a similar pattern existed. The market flies higher for a while, has a period in which that path of growth slows, and then essentially rolls over…and dies for 2 more years.This was a less defined head-and-shoulders picture, but who cares? The point is that momentum slows, then stops. Like when you are lifting weight and the 20th time you do it is not as easy as the first or the 10th…and then you put the weight down.

Head, shoulders, knees and toes?

That’s what I see developing. Will it develop? We will know in the coming weeks. But here is the key point: don’t wait until you start to see your account balance dive before you take account of what you own, and why you own it.Is there a true strategy that is pointing you toward your retirement and other goals? Or, have you (or your financial advisor) created a situation I call a “collection of investments” which are not nearly as poised to preserve capital as you think.When my kids were young, we played the song and game referred to in the sub-heading above. That taught them a little about the human body. So when it comes to head and shoulders patterns, know that if it breaks, the market could head to its knees and toes. Have a process and a plan for that.Related: A Recession Won’t Wreck Your Retirement … But This Will