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The Market is in a Perilous Double Bind

Perilous

At the time of writing this, the S&P 500 and Nasdaq just hit record highs, fueled today in part by strong corporate earnings.

In fact, stock market performance in all of April has been net positive, with Chinese trade data showing recovery, optimism around the US-China trade talks lifting investor sentiment and the fact that around 78% of all S&P 500 companies reporting earnings have beaten expectations.

Yet, if we penetrate the headlines and go beneath the surface, we find a deep and irreconcilable contradiction, one blatant enough to concern any serious investor.

There are two fundamentally opposed rationales fueling the stock market right now. And while both may be extending the current bull market, ironically, neither rationales lead to a bullish end.

The first line of reasoning sees that the recent slump in the current economic expansion has come to an end and that global growth has resumed. It looks to the latest Chinese trade data as evidence of this recovery.

The second line of reasoning sees a weakening in the current economic expansion; a potential endpoint, causing the Fed to quickly shift from raising rates to potentially cutting rates; from aggressively trimming its balance sheet to potentially flooding the markets with more liquidity.

Do you see the contradiction? Investors are flooding the markets with capital because a) the economic expansion is once again picking up steam, and b) the economic expansion is weakening.

These are two opposing scenarios. It can’t go both ways.

The market is locked in a deep contradiction with itself. And this contradiction is what’s fueling its rise. It’s a schizophrenic market.

Yet the case for bullishness is just as confused and irrational as both rationales.

If global economic growth resumes, then interest rate hikes are back on the table, killing stock market gains.

If, on the other hand, the global economy slows or falls into recession, then corporate profits will decline, killing stock market gains.

Either scenario spells downside. Nothing spells upside, except for the short term. There’s only one way to make sense of this all: the market is in a perilous double bind, and most investors are too myopic to see it.

And if you are invested in the market, there is only one thing you can do that makes sense: hedge a portion of your portfolio so that you can ride out the coming storm while waiting for the next bull market cycle.

Among all the things you can do to hedge your exposure, buying safe haven assets like gold and silver can help you achieve both portfolio growth and capital preservation during times of economic instability.

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