Everywhere we look right now, we see claims of strength.
“U.S. Economy Again Leads the World, IMF Says,” reported one recent headline.
In similar fashion, the S&P 500 has rallied strongly for the past 12 months. The index keeps making new all-time highs.
Even industrial stocks like ExxonMobil (XOM) and Caterpillar (CAT) have been ripping higher. CAT recently gained around 20% in just a month.
And we’ve recently seen a solid start to earnings last week. Banks easily beat market forecasts. Plus, there’s been a recovery in jobs data.
Altogether, it looks like good times are here to stay…
But I’m here to say: Investors are getting way too complacent.
And I think that’s a big mistake…
Creeping Inflation
When the market gets overly excited without the fundamentals to back it up, it can be a dangerous time.
Because it could be vulnerable to a correction.
Just look at the early 2000s and the Great Recession of 2008. Or think back to when tech stocks meteorically rose in 2021 – before imploding in 2022.
When exuberance outruns reality, things have a way of turning around fast.
That’s what we could be facing now…
Stock valuations are near their most stretched levels of the past 30 years. At writing, the forward price-to-earnings ratio for the S&P 500 stands at 21.5. Since 1994, it’s only been higher heading into the early 2000 internet bust and just before 2022’s bear market.
Now, I don’t necessarily think we’re about to experience a crash. But I see trouble ahead all the same… and it’s going to catch plenty of people off-guard.
After all, the prospect of interest rate cuts has driven much of the rally over the last 12 months.
The first 0.5% cut took place last month. And the Fed made it clear that it believes inflation is under control.
But inflation has a way of creeping back…
Earlier this month, we saw it tick higher. The Consumer Price Index (CPI) inflation data came in at 0.2% month over month – 0.1% over the forecast. The annual number likewise stayed 0.1% above expectations at 2.4%.
When you cut out food and energy, core prices put the annual rate at 3.3%.
These numbers may not sound like much, but they’re above the Fed’s 2% target… and hint that inflation could be stickier than the Fed wants to admit.
And that’s before you get to the upcoming elections.
Whichever way the election results go, inflation could get a boost…
One side is talking about new tariffs on imported goods… The other wants a range of new government programs that don’t come cheap. Economists say both candidates’ plans will expand the federal deficit over the next 10 years.
The rebound in jobs data could also put upward pressure on wages, another inflation factor.
If inflation does prove resilient, it could make the timing of the Fed’s future rate cuts tricky.
And if the market’s rate cut anticipation gets disappointed… that could be a sign to “watch out below.”
But that’s not the only reason I’m treading cautiously right now…
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Exercise Caution
There’s a well-proven market indicator that’s flashing red right now.
And almost no one is talking about it. But if it proves accurate, then we could be facing a “chaos period” ahead.
That’s why I’m telling you to exercise caution.
Most people seem to have forgotten the sharp sell-off in July that ended in a rout on August 5. But as that showed, the market can reverse sharply and tank without warning.
Those who blindly “buy the dip” and wait for the bounce might find themselves severely disappointed.
While I’m not predicting a big crash, I think the market will soon transition into a period of high volatility.
Those who simply try to ride it out could lose several years of potential returns.
That’s if they have the stomach to hold on through the ups and downs.
This volatile market could last several years, which is why I want you to have a plan. I’ll explain how you can get ready at my Countdown to Chaos briefing next week.
There, I’ll break down the situation we’re facing… and the best way I know to make money during the chaos.
I’m planning it for October 30, so there will be time to prepare before the volatility hits… and I highly recommend that you attend. To automatically reserve your place, simply go right here.
Not only will I share the strategy that has worked best over my 40-year career, but I’ll also brief you on a ticker that will be a great way to take advantage of this chaos period.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict