Stocks are on the verge of another massive plunge, possibly 20% below our current levels. That’s the latest warning from leading business cycle think tank ECRI (Economic Cycle Research Institute).
Despite a strong start to 2019, the stock market remains vulnerable as slowing economic growth is becoming more and more evident.
ECRI’s argument rests on the probable scenario that the US economy is approaching the end of a business cycle; a matter that we covered in a previous article on the positive unemployment report sinking below 4% (it generally happens at the end of a cycle).
As Achuthan, ECRI’s co-founder said on CNBC’s “Trading Nation,“The elephant in the room remains the cyclical slowdown. And, as long as that slowdown is in play… the risk of a correction remains. It hasn’t gone away.”
Based on a chart of S&P 500 index corrections and slowdowns in relation to the US growth rate over the last decade, near-term territory indicates a strong possibility of a cyclical downturn.
“It’s really about the direction of economic growth. It accelerates and decelerates. It goes in cycles,” Achuthan said, stating that the “risk of a 10 – 20 percent correction pops way up” during a slowdown.
Last year, ECRI used the same chart and mode of analysis to predict the market corrections in 2018.
With their indicators flashing red late in 2017, ECRI signaled investors to be cautious as they approached the new year. A few months later came the massive volatility and declines that erased almost all of the 2017 gains.
What’s notable about ECRI is that in a financial environment saturated with media–most of whose pundits were overly-optimistic–they were one of the few who warned that a slowdown was underway.
This should be nothing new to our readers, as we have presented several reasons (and from various angles) for why a major slowdown and market crash can occur.
Since the start of the year, the market’s comeback of over 6% has been fairly impressive.
But many would argue that the underlying fundamentals have NOT changed.
Achuthan seems to agree, stating that “we’re still in this slowdown. There is more to come. It is not over.”
The bottom, according to his analysis, depends on the recovery of the global economy.
Should the impending correction turn into a full-blown bear market, the good news is that bear markets on average last around 16 months (the longest one in 1949 lasting 36 months) with an average return of -34%.
The question you should ask yourself is whether you can achieve growth while protecting your assets during the decline.
Both capital preservation and portfolio growth are possible through proper allocation, particularly if you hold an all-weather portfolio consisting of 25% stocks, 25% bonds, 25% cash, and 25% physical gold.
This is called a Permanent Portfolio and its the only portfolio model that has proven to weather financial storms from 1926 to the present.
There’s no reason to suffer bear markets, recessions, and inflationary reductions to your purchasing power if you just allocate your assets safely and intelligently.