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After almost two years of unusually low volatility, 2018 came in like a lion. The stock market fell 12% from its January pedestal as fear creeped back into the market. The VIX spiked to a five-year high in February. Wall Street pundits climbed over each other to call for the next bear market.
Of course, rising volatility does not instantly lead to a bear market, and we saw that as the S&P 500 moved back into all-time high territory in August and September. And no sooner did fear turn back to joy than the market dropped one more time into stock market correction territory with a dip of 11.2% in October.
This kind of market makes investors uneasy as day-to-day movements seemingly focus more on risk than on return.
Chances are, the stock market is not going to calm down anytime soon. Money Morning Liquidity Specialist Lee Adler sees plenty of warnings in the latest economic data. That suggests we really could see a real bear market in 2019.
Here are the three red flags we're watching for...
These Numbers Could Signal a Bear Market in 2019
Although job numbers are strong and consumer confidence is high, there is data from the government that could be a canary in the coal mine for the economy. Interestingly, they all revolve around tax receipts. In other words, the feds are taking in less than we thought.
That does not seem so bad until you realize why it is happening.
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Take excise taxes, for example. Even though these taxes are fluctuating, likely due to fallout from the newly enacted tax law, the general trend is down. And that means the unit volume of sales is down, which, of course, is not good for the economy.
Think about it. Gas tax revenue is down, and aviation tax revenue is down. Both are early warning signals of a slowdown in commerce that does not show up in the broader economic numbers.
Will that stop the Federal Reserve from its campaign to bring interest rates back up? Likely not until the conventional data catches up. And that means interest rates can help squelch economic growth further.
We're already seeing evidence of it.
In Tuesday's trading, retail stocks got crushed. L Brands Inc. (NYSE: LB) plunged 17.7%. Kohl's Corp (NYSE: KSS) dropped 9.2%. And Dillard's (NYSE: DDS) fell 6.4%. And all these stocks suffered for the same reason: weaker-than-expected earnings. The resurgence in this beleaguered sector that began earlier this year came to a screeching halt.
Retailers, aside from facing the threat from online competition, are dependent on discretionary spending and positive outlooks by consumers. That they got crushed on bad news is indicative of the market's view that they will not make as much money as everyone thought.
Fortunately, now that you know the truth, you have time to protect yourself...
What You Can Do to Protect Your Money
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The big question is what investors should do about all of this volatility and weakness. Parking all your cash under the mattress seems like a possibility, but that means you could lose out to rising inflation and you'll miss the rebound that will eventually happen.
Rather, there are many other ways that offer protection from the storm while at least paying you dividends as you wait for better times. Stocks with high dividends can cushion the blow. So, too, can value sectors that consumers cannot live without. These can include soap, soup, and medicine.
And as you've heard us here at Money Morning talking about for months, stocks that follow the Unstoppable Trends in demographics will last for years to come. Sure, some of them, such as technology, took a beating in recent weeks, but the world cannot live without their products. Perhaps a shopping list of high-quality tech and other stocks that are now seriously down in price - and offer great value - would be a good place to start.
But if you're serious about protecting your financial future, then you need to take a look at this...
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