The Dow Jones is nearing its all-time high of 25,000 points, capping a year of 24% growth. But a 2018 market correction might be more likely than you think...
A market correction is defined as a stock market downturn of 10% or more. We've been in the second-longest-running bull market in history for the last eight years and have had four corrections during that time. The last correction was in 2015, when the Dow dipped 11% between July and September.
Now, that doesn't mean we will definitely see a stock market correction in 2018.
But investors can't afford to let the stock market's recent performance lull them into a false sense of complacency, especially if they are nearing retirement age.
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Market corrections are normal parts of the stock market's cycle and should be expected. But even though they are normal, they can slice off 10% or more of your portfolio.
And there are more market correction warning signs than the simple fact that we haven't seen one in two years.
Here's why investors should be considering a way to protect their money, along with our plan to do just that...
How the Fed Could Trigger a Stock Market Correction in 2018
While we aren't making a market correction prediction, the stock market's recent gains may not last thanks to the Federal Reserve.
You see, the Fed has helped boost stock prices during this bull market run.
During the 2008 financial crisis, the Fed slashed interest rates in an attempt to revive American business. The idea was that cheap borrowing costs would encourage businesses to borrow, expand, and jumpstart the economy.
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The Fed slashed rates from 5% during 2007 to 0.25% in 2008, the lowest rate ever.
And businesses did take advantage of the cheap borrowing costs...
Public firms utilized low interest rates to buy back their own shares. In the seven years between 2009 and 2016, they borrowed $1.9 trillion, yet repurchased $2.1 trillion.
That's part of what's helped boost stock prices since 2009. The Dow is up over 240% since March 2009, thanks, in part, to trillions in share buybacks.
But that's also sent stock prices to historically high valuations.
The Cyclically Adjusted Price Earnings (CAPE) ratio, one of the best measures of stock market valuation, is currently at 31.42. That's 87% above its historical average. And it's only reached a higher level twice in our history. The first was just before the 1929 stock market crash. The second was just before the dot-com bubble crash in 2000.
Again, we can't predict a market crash, or even a market correction, but the historically high valuations show us that the Dow's record highs shouldn't lead to unvarnished optimism.
That's especially true now that the Fed just hiked rates for the third time this year...
Today (Dec. 13), the Fed just announced another 0.25% increase in the interest rate. That's its third hike this year and fifth since December 2015. Interest rates rose above 1% in 2017 for the first time since 2008. And with three more rate hikes expected in 2018, the interest rate will also rise above 2% for the first time since 2008.
That means the era of cheap borrowing is coming to a quick end, and the share buybacks that helped boost stock valuations won't be so easily financed anymore.
While stocks could certainly continue to grow higher, especially if Congress' tax cut plan is passed, the possibility of a market correction in 2018 is higher than the financial media let on.
Fortunately, there are ways to protect your money without fleeing the stock market...
Our 2018 Market Correction Protection Plan
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The two stocks we're recommending have a track record of performing even as the broader market declines. Both of these stocks brought positive returns during the tech crash in 2000, even as the overall markets fell more than 10%.
While there's no guarantee these stocks will be immune from the next correction or pullback, they are some of the best companies in the most in-demand industries.
Money Morning Chief Investment Strategist Keith Fitz-Gerald thinks investors should hold on to stocks in the "Unstoppable Trends." The trick to making huge profits is to find "must-have" companies that fall into these six "Unstoppable Trends": medicine, technology, demographics, scarcity and allocation, energy, and war, terrorism, and ugliness (also known as "defense"). The Unstoppable Trends are backed by trillions of dollars that Washington cannot derail, the Fed cannot meddle with, and Wall Street cannot hijack.
By owning well-run companies in these Unstoppable Trends, you'll own resilient stocks that will charge out of any market downturn, leaving behind anyone who sold off stocks for other assets. And if the market doesn't correct, these stocks are still going up.
That's why we're bringing you two of our favorite stocks from the Unstoppable Trends.
Raytheon Co. (NYSE: RTN) is our play for the trend of war, terrorism, and ugliness.
Raytheon is a leader in the defense industry, with billions in contracts with the U.S. government and other countries across the world. That means if the market falls, Raytheon is going to continue to excel over the long term.
Raytheon has billion-dollar contracts with the U.S. government, but it also has a diverse customer base. International customers make up just under half of its business. That means even if a few countries cut defense spending during an economic downturn, RTN still has plenty of other customers to help it weather the storm.
But RTN's real allure as an Unstoppable Trend pick is the fact that war is a reality of the world. For instance, as tensions rise abroad, the United States is more likely to need more weapons and equipment. When the United States launched a missile strike on a Syrian airbase on April 7, Raytheon's stock jumped more than 2%, since its missiles were used.
RTN currently trades at $188.93 a share and pays a 1.69% dividend yield. RTN is up 33% this year. But investment banks are still giving RTN price targets well over $200 over the next 12 months. RBC Capital predicts RTN stock could hit $225; that's a 20% jump.
Becton, Dickinson and Co. (NYSE: BDX) is an example of a play in the Unstoppable Trend of demographics.
BDX is a healthcare company specializing in one-time use medical products utilized in hospitals and long-term care facilities. That means as populations age, more people will need this type of medical care, and BDX will be in even higher demand. People will need healthcare whether the market falls or not.
But BDX is also an exceptionally well-managed company. It has a 10.54% profit margin and maintains a 1.58% dividend yield, even after a $12.2 billion takeover of CareFusion two years ago. That means the company's capital management is sustainable and will easily survive a market downturn. And that's good news for its shareholders during a stock market crash.
BDX trades at $219.33 and pays a 1.37% dividend yield. BDX is up 32.28% year to date. Wall Street analysts are also giving BDX a 12-month price target of $260, a 19% increase from today's prices.
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