Why I Just Got Out of the Market Completely

America On the Threshold of a Second Recession

I just moved every single dime of my entire retirement portfolio, including 401k, out of all market-linked mutual funds and into no or low risk bond funds. I believe the stock market is severely over-valued presently, and that a nasty market correction is imminent. Economic growth is weak and stimulus-driven, unemployment is not improving, and I believe we are on the precipice of sliding perilously down the second jagged dip of a double-dip recession. Read on if you need convincing.

All of the rosy economic news we’ve heard over the past couple of months is déjà vu. Yes; we’ve been down this road before. During the Great Depression, things had started to look up around ’37. By then, unemployment had fallen to 14% from its high of 25% in ’33. GNP grew by 14% from 1935 to 1936. The stock market had regained 50% of its losses borne during the crash of 1929, but fell again in 1937, and remained bearish until the beginning of World War II. The mini-collapse of 1937 and the relative sluggishness of the economy thereafter snuffed out the light at the end of the economic tunnel for a nation struggling to regain a solid footing on its financial future.

In many ways, we are at the same point in the course of this so called “Great Recession.” It is important to point out that the present economic situation is in no way near the size, breadth, and scope of the Great Depression. The economic indicators underlying the 2008 recession are worlds away from those that followed in the years post-crash-1929. (Despite the emotional and sensationalized rhetoric and scare tactics that are carelessly thrown around by politicians and pundits, which draw comparisons of the present slowdown to the Great Depression, the 2008 recession is actually a stroll in the park, economically speaking, when compared to the Great Depression.) Despite these differences in scope and size, the two events do share structural similarities. Both are the bust side of boom and bust business cycles, both involved prodigious government spending, both have stubbornly high unemployment, and both appear to be protracted relative to other recessions, such as those of 1981, 1990 and 2001.

Second quarter 2010 GDP data showed that the economy has regained substantial momentum, and has surpassed GDP volume of the quarter just prior to the recession that took hold in the third quarter of 2008. The stock market has regained 80% of its pre-recession losses, and unemployment has finally budged a bit. While many may see all of these signs as tremendously positive, they are frankly frightening to me, and it feels eerily reminiscent of the fiscal environment of 1936.

The recovery we have seen over the past few months has just been too much too fast. The great economist John Maynard Keynes, who died in 1946, has been resurrected by both the Bush and Obama administrations. We don’t really understand how much of the gains in GDP are a function of Keynesian policy and stimulus spending rather than true organic economic activity and private investment: the engines that will take us once again into future prosperity. With 10% of the workforce remaining on unemployment benefits for the foreseeable future, it is difficult to believe that the recent vigor of key leading indicators, the markets in particular, are not swollen and overly inflated. Also, we mustn’t forget that the volumes of recent legislation has created new bureaucracy and added significant costs to doing business, which in turn has spooked private enterprise into freezing its hiring and expansion plans. People often forget that business does not have a mandate to hire and grow, and will simply choose not do so in the face of uncertain employee health care, regulatory, and tax costs. The volatility of the market since April, where swings by as much as 10% have been observed, is yet another sign pointing to the presence of another Wall Street bubble. Such volatility is indicative of investor tension and nervousness as they struggle to decide whether to stay in, or get out. When investors are confident, they get in and stay in, and such erratic fluctuations are seldom observed when confidence pervades.

If you want another reason to support a get-out-now investment strategy, then Google the term “Hindenburg Omen,” which is a set of technical criteria that has reliably predicted market declines 23 out of the past 25 times it has been triggered. The Hindenburg Omen was officially declared to be triggered, and confirmed by the Wall Street Journal on August 20, 2010. Red flags are flying everywhere.

When the bubble bursts—I believe the correction, perhaps even a mini-crash, will occur in late August or early to mid-September of 2011—I don’t want my money to be anywhere near the stock market. My advice is to get out now with some modest gains, and then get back in after the markets bottom out. Once it bottoms out, you can immediately jump right back in once a degree of equilibrium is attained. If you don’t know what to do, then pick up the phone, call your brokerage firm, and ask for the most conservative investment option available. Most good firms allow customers to make unlimited changes to their portfolios, and most will not charge fees for moving money from mutual funds to other types of investments such as bond funds. Make sure that your new accounts do not have any new fees associated with them and that the destination fund is compliant with all IRS guidelines governing employer-sponsored 401k plans.



DISCLAIMER: I am not a financial advisor, but just a regular Joe who is trying to hang on to his hard-earned money. So, please consult a professional before making any financial decisions. I could be wrong, and I don’t want any of you blaming me if by chance the market continues to rally.