Since Bryan is on vacation this week, Martin asked me to pinch-hit as a guest editor today. And it couldn't come at a better time, because at present, the Weiss Capital Management investment team is on high alert for a potential market sell-off.
We've had a nearly uninterrupted market rally over the past 12 months, but now we believe it's time to play good defense … and take steps to help protect your gains. Let me explain why …
Naturally, the bulls are quick to point out the 70 percent surge in stocks since the March 2009 lows … they'll tell you this is a sure sign the economy is recovering … and that we're back to business as usual.
But don't believe it! If anything, this rally should give you even more reason to be vigilant right now.
After all, stocks certainly can't be considered bargains anymore. Based on measures of long-term price-to-earnings ratios, the S&P 500 is as much as 25 percent overvalued now.
Stocks have gone nowhere but up for over a year, and now they're trading at expensive valuations, just like in 2007 … and, needless to say, you know what happened next …
Nevertheless, true believers in the recovery continue to ignore valuation while driving share prices even higher. In our view, the rally could come to a crashing end at any time.
What Happens When the Bailout Recovery Ends?
Our biggest concern is that this is not a "normal" recovery at all and our economy remains highly susceptible to a relapse at any time.
The so-called recovery, along with the rally in financial markets, has been largely bought-and-paid-for with taxpayer dollars … with TRILLIONS doled out by Washington for various stimulus and bailout efforts.
- In fact, federal government spending and transfer payments now account for nearly ONE FOURTH of our entire economy!
- To put this in perspective, even during the Great Depression - with FDR's massive New Deal costs - government spending to GDP peaked at just over 10 percent.
- That's less than HALF of where we are now - with federal spending today closer to 25 percent of GDP!
This deficit spending is simply unprecedented and it carries dangerous unintended consequences. Once this government stimulus is withdrawn … what then?
Can the economy - and especially the weak financial sector - sustain a rhythm of growth, without even more massive bailouts? Or, will it be right back to the emergency room for life support?
Only time will tell. But since the government is already winding down support, we may not need to wait much longer to find out what's next.
Three Key Indicators Forewarn Potential Market Sell-off
Warning Flag #1: Leading Indicators Are Lagging Again: The first cause for concern is a sharp divergence in the indicators that predict the direction of the economy.
Take a look at the index of leading economic indicators, which appears to be clearly rolling over, a sign our economy may be contracting again.
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