Turns out, last month was the best January for the S&P 500 since 1987.
This fact is remarkable considering the volatility in the market and ongoing rumors of recession, government shutdowns, and trade wars.
However, I don’t like to invest on news like this until I’ve been able to talk things over with experts I trust.
Fortunately, I know just the guy…
Leon Wilfan is not your usual Wall Street character. He’s a self-made, self-proven investor who has seen many bull and bear markets over his prosperous investing career.
If anyone knows what to make of the current situation, it’s Leon… so I asked him if he would sit down with me to discuss.
Our conversation went like this:
Leon Wilfan On Where The Stock Market Is Going From Here
Kathleen: Leon, the market made an impressive rally in January. Should I take this as a positive signal and get back in?
Leon: I wouldn’t advise anyone invest in the stock market just because it has risen in value.
Investors should be looking to enter after the market has had its worst month and to exit when it’s had its best.
However, really, investors have to look beyond price movements and understand why the market reacted in January the way it did. What are the major forces behind its appreciation and how will they behave in the future. Only then can an investor decide whether or not to invest.
Kathleen: So, what are the forces affecting the market at the moment?
Leon: On one hand, you have the Federal Reserve (Fed) halting interest rate hikes, a strong domestic economy, and a low unemployment rate. These forces point upward.
On the other hand, you have the yield curve inverting, front-end cyclical stocks underperforming, and lower earnings estimates. These are classic recession signals.
Also, note that the signs pointing upward are all lagging indicators, those that look at past data, while the latter signals are forward-looking. Favor the latter when making my investment decisions.
Kathleen: Should we expect a recession in 2019?
Leon: The forward-looking indicators certainly point in that direction, but this doesn’t mean you should disregard other factors. Too many times I see investors focusing on just one set of indicators, and that’s dangerous. You have to consider all available data to get the whole picture.
That said, it’s hard to make a case against a recession right now.
We are late in the economic cycle, growth is slowing down, and, while it could take time before negative GDP numbers appear, I don’t see the stock market reaching new highs… not when valuations are so close to the “panic zone.”
Kathleen: Ah, the infamous “panic zone.” Could you tell us more about it?
The “panic zone” is a tool I developed to determine when stocks are overpriced to the point where I predict a crash will follow.
To identify it, I look at three metrics and compare them to a bull market of the past that is most similar to the current one.
The three metrics are the Shiller price-to-earnings (PE) ratio, price-to-sales (PS) ratio, and inflation-adjusted S&P 500 index.
The historic bull market most similar to the current one took place during the 1990s. Then, as now, interest rates were kept artificially low for way too long, which inflated the stock bubble.
Leon: The first one, the Shiller PE ratio, has to go above 32 to be in the zone. In the 90s, it first reached this level in July 1997, preceding a double-digit decline the following month.
This time around, this indicator entered the panic zone in December 2017 and again in August 2018, both times preceding a double-digit drop by two months.
The second ratio, PS, has to be above 2.10. It entered those levels at the start of 1999 and again, most recently, in December 2017. Both times, a correction followed soon afterward.
Finally, I look at the inflation-adjusted S&P 500 chart, to see how close the current levels are to the long-term resistance. I consider any value that moves within 10% of the line dangerous.
Whenever one of these indicators moves into the panic zone, you should reconsider your portfolio. When all three converge, run for the door. A crash is imminent. The fourth quarter of 2018 was such a case.
Kathleen: Are we still in the panic zone at the moment?
Leon: Not exactly.
Right now, the market is just outside the panic zone, due to a recent crash, but I predict that we could be back in as early as March 2019.
The three metrics must decline much further for me to consider the market safe. Until such time, I would be careful about investing.
Kathleen: Where do you see the potential to make a profit in 2019?
Leon: Right now, I see three trades with a lot of potential.
The first has to do with emerging markets. They are trading at massive discounts, and the forces behind their fall are changing direction. I talk more about this in “Winter Sale 2019—Up To 74% Discounts On These Emerging Market Stocks.”
The second trade that interests me are companies with stable cash flows and business models that are immune to changes in the economic cycle. I recently uncovered one such stock that I share with readers of my True Retirement Wealth in the issue to be published tomorrow.
Finally, I think that certain precious metal stocks offer a lot of upside potential. My two January picks from this sector, also available to True Retirement Wealth subscribers, are already up by 17% and 14%, respectively.
At this rate, this investment should double in less than half a year.
Kathleen: Great advice as usual, Leon.
Leon: My pleasure.