How to Protect Yourself from a Stock Market Crash in 2019

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.

stock market crash in 2019We 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.

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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...

How to Turn Rising Interest Rates into Rising Profits

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With bond prices falling thanks to the Fed, a simple play is to short the bond market.

We know that not all investors are fond of short selling. There are certainly risks. But there are also plans that can help you realize the same profits that short sellers do.

One such plan involves exchange-traded notes (ETNs).

According to Money Morning Resource Specialist Peter Krauth, investors who own an inverse ETN are positioned to profit from any panic stemming from climbing interest rates, because the ETN will rise as bond prices fall.

Now, Krauth advises that an inverse ETN should only be a small part of a total strategy for investment. It should also only be considered by investors with strong risk tolerance, as it is definitely a speculative play.

Krauth recommends as an ETN the iPath U.S. Treasury 10-year Bear ETN (NASDAQ: DTYS), which will inversely move with the 10-year Treasury price. It will trade along with the yield on the 10-year.

The gains on DTYS have doubled in the last 27 months, and we think that the profit potential is just beginning.

Interest rates are likely to continue to rise, and worldwide debt is tremendous and rising.

Given the amount of global debt, it's likely that at least some of it won't be ultimately repaid. This is bad news for the value of bonds but will be profitable for anyone holding the Bear ETN.

But that's just the start for what you need to do to protect your hard-earned cash...

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