With just a few months remaining in 2018, we find ourselves enjoying the longest bull market in modern history. A number of unique factors have contributed to the current stock market climate. Innovation has fueled a continuing boom responsible for much of the market’s upside momentum, especially among the group of tech giants popularized by CNBC's Jim Cramer as FAANG (Facebook, Amazon, Apple, Netflix, Google). The unexpected election of President Donald Trump and his corporate tax cuts and new trade policies have caused numerous spikes and dips, known as flash crashes. And that’s just scratching the surface.
One of the largest contributors to the current bull market was the Federal Reserve’s Quantitative Easing (QE) stimulus program. Following the 2008 financial crisis, Federal Reserve Chairman Ben Bernanke pulled what some called an “epic post-financial crisis experiment in cheap money stimulus” by cutting interest rates and buying up to $600 billion in mortgage bonds. The result was cheap cash that, while initially stimulating the economy, has years later resulted in today’s excess liquidity. Now, the Federal Reserve is unwinding the program by reducing their bond purchases and raising interest rates.
Analysts and policymakers are now saying that this current market cycle, which started in 2009 and has been running for nearly a decade, will soon end. Interest rates have been rising as the Federal Reserve tightens up to curb inflation and slow down the economy amidst fears. Investors’ emotions are shifting. We’re due for a market correction.
Most Experts Agree: The End Is Near
Many financial professionals have been vocal about the fact that key indicators suggest our current market cycle is coming to an end. Some of these indicators include rising interest rates, a flattening yield curve, record corporate and household debt, an overheated jobs market, and increased mergers and acquisition (M&A) activity.
Ray Dalio, the billionaire founder of the world's largest hedge fund (Bridgewater Associates), recently told CNBC that the current market cycle has about two years to run and urged investors to be “more defensive” as risk rises. Sam Zell, the billionaire who founded one of the first REITs (Equity Residential), in the 1960s, offered similar sentiments about the stock market cycle, giving the market another two to three years to complete its cycle.
Marko Kolanovic, Global Head of Macro Quantitative and Derivatives Strategy team for J.P. Morgan Chase, agreed with his peers and took things a step further by issuing a warning to investors: thanks to an increase in computerized trading and passive investing, the end of the current market cycle could create the perfect storm for “potentially violent moves” once the bear market begins.
In what Kolanovic calls the “Great Liquidity Crisis,” the end of the current bull cycle will be much more intense thanks to the shift from active to passively managed investments, a rise of automated trading strategies, and the fact that electronic trading desks at banks and other firms tend to withdraw when markets get rough. In short, processes that were once human have now been overtaken by mathematical, mechanical supercomputers that are programmed to act in a well-defined and often aggressive manner. According to Kolanovic, “if markets fall by 40 percent or more, the Federal Reserve would need to leap into action to prevent a spiral that led into depression.”
Real Estate: The Alternative Solution
Alternative investments such as private equity real estate can rise and fall outside of traditional market cycles. They help diversify portfolios and can hedge risk for investors who are currently overweight in traditional equities (like stocks, bonds, 401(k) and IRA portfolios, mutual funds, and ETF’s).
When our current bull market comes to an end, individuals who are completely invested in the stock market will be most impacted. By incorporating alternative investments such as real estate, investors can defend themselves against the algorithm-dominated stock market and focus on long-term value investing.
Subscribe to gain more insight into how real estate investments can improve your financial outcome, reduce your risk, and diversify your portfolio—before the current market cycle comes to an end.
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Extra sources
Need to add notes on the primary and largest contributor to the bull run: the Federal Reserve’s Quantitative Easing (QE) stimulus program, which is the real cause of the “excess liquidity”:
https://www.cnbc.com/2017/11/24/the-fed-launched-qe-nine-years-ago--these-four-charts-show-its-impact.html
https://www.businessinsider.com/how-the-fed-raises-interest-rates-2017-12
https://seekingalpha.com/article/4208989-feds-quantitative-tightening-bulls-death-knell
https://www.cbsnews.com/news/3-reasons-for-the-longest-bull-market-ever/
