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As the market began to slide to its worst December since the Great Depression, the risk of a stock market crash in 2019 grew.
While stocks are up about 3% in the New Year, investors aren't completely free of the risk of another market crash just yet.
We aren't predicting a stock market crash, but rising uncertainty and global instability could lead to another bear market. Or the markets may remain choppy, with no clear direction.
Now that the current bull market is the longest on record, investors know the good times won't last forever. And while a bear market won't ruin your portfolio, a market crash could be catastrophic for those who are nearing retirement or are weighted heavily toward stocks.
That's why we want to make sure every investor knows the risks and has a plan for the worst-case scenario.
Here's what we're watching – and what you can do to protect your money in 2019…
Rising Debt Might Start a Stock Market Crash in 2019
Global debt could be the biggest threat to the stock market's health this year.
In mid-2018, the Institute of International Finance issued a warning that the climb in global debt had been the most extreme in the last two years. In the first quarter of 2018 alone, debt rose $8 trillion – to hit $247 trillion.
Now, $247 trillion equals 318% of global gross domestic product.
And that's simply unsustainable.
It means the world is overextended and isn't productive enough to pay back its debts. Just as individual households would be bankrupt if they owed 318% of their yearly income on credit cards, mortgages, and other loans.
At month-end in November 2018, U.S. debt alone rose to $21.79 trillion. The interest alone is forecast to rise $310 billion every year if current conditions remain the same.
Eventually, debt has to be repaid. But when the entire world is overextended, who is going to be repaying the debt? It may result in U.S. taxpayers bearing the burden.
And that bill couldn't be coming at a worse time…
The Fed Is Threatening Stock Gains
The Fed has been on a rate hike spree, and while Fed Chair Jerome Powell is taking a softer tone this year, at least two more rate hikes are expected.
You see, in the financial crisis of 2008-2009, many countries drastically lowered interest rates to stimulate growth. Lower interest rates make borrowing money cheap, encouraging companies and individuals to borrow and spend more.
But now that the global economy has improved, central banks need to raise rates. They want to make sure the economy doesn't grow too fast – what they call overheating – but they need to have a tool to fight the next recession too.
But the Fed's rapid rate hikes are putting pressure on the bond market.
In September 2018, the benchmark 10-year Treasury interest rate advanced 50% over its rate the previous 14 months, to 3.06% from 2.06%.
When interest rates rise, the value of bonds and Treasury notes fall. If you're holding a bond and new bonds pay a better interest rate, then yours is instantly less valuable. In a three-week time span in September and October, $1 trillion in the value of bonds was erased.
Now, Money Morning is not forecasting a stock market crash yet. But we do think that every investor needs to plan for the worst-case scenario.
And this is exactly how to play it by turning the Fed's reaction into profits…