A Summary of Stock Market Warning Signs

Investors were lulled into a complacent state by the effects of the massive monetary injection by global central banks in late 2011. The new money turned around major global economies and boosted asset prices, especially equities and real estate. But that’s the past. The monetary expansion programs are winding down, and the global economy is showing negative effects. It appears to me that there isn’t any country where the economy is self-sustaining right now without a large amount of stimulus. Consider these points:

* Europe continues to deteriorate at a rapid rate. After four years of crisis, things are worse than they were at the start. The debt to GDP ratio of the troubled countries continues to rise. The countries are paying more to service their debts because interest rates are rising. At the same time, revenues are declining because of poor economies and capital flight. Banks in the core countries that lent all the money in the first place aren’t lending now, because they need to shore up their balance sheets.

* India and China are having problems. These are the two leading emerging economies and a major factor in the emerging economic boom of the last few years. India’s problems seem rather serious, though they haven’t been widely reported. Its currency is in trouble; the stock market is down; and the economy just recorded its lowest growth rate in nine years. See here for details.

* The U.S. economy and stock market had been doing well, causing some to argue it now was delinked from the global economy. I don’t see that. The latest data for the U.S. largely were below expectations. Growth in the U.S. clearly is slowing toward zero and perhaps below. See here for some details.

* U.S. stocks are about to turn in their worst month since Sept. 2011, which was pretty bad. The news is so bad that even gold, the usual crisis hedge, is having problems, turning in its worst month in 13 years.

A number of investors and businesses are counting on the central banks to come to the rescue again with another round of monetary stimulus. But you don’t know when that might come, and how bad things will become before they act. Also, there’s no guarantee that the stimulus will be as effective as in the last few years. I recommend you take less risk in both your portfolio and your business than you would in normal times. Stay balanced and diversified. There’s a probability of 25% or more that policymakers in Europe will continue to make mistakes and allow the situation to spin out of control as it did after the Lehman Brothers bankruptcy.