This Dire Economic Indicator Suggests That You Should Sell Now or Suffer Substantial Losses

This indicator is signalling that it may be time to sell your stocks and seek shelter in defensive dividend stocks like Shaw Communications Inc. (TSX:SJR.B)(NYSE:SJR).

| More on:

If you’re a close follower of financial media, then you’ve probably come across multiple bearish articles that seek to warn investors about the inverted yield curve, a disturbingly accurate recession predictor that tracks the spread between the short and long-term (10 year) Treasury yields.

The inverted yield curve has predicted the last seven recessions, and if you’re a gambler, the occurrence of a recession by the conclusion of 2020 may seem a good bet to make if the yield curve does, in fact, flip on its head at some point over the next few quarters.

Today, the yield curve is flattening and an inversion is looking imminent. All it’s going to take is a few more rate hikes from Fed chair Jerome Powell before both the yield curve and the markets turn upside down, so with that in mind, does it still make sense to be a buyer of stocks?

Before you offload all your stocks and head for the exits, you should know that not even the “accurate” yield curve is a fool-proof recession predictor even though many doomsdayers may tout it to scare investors to the sidelines.

The yield curve is flattening. Therefore it’s going to invert, and a recession and crash will ensue isn’t a thesis that you should buy. It’s an overly simplistic way of thinking — and it doesn’t tell the whole story.

According to historical data, a recession kicks in approximately one year after the yield curve inverts. While it’s true that the yield curve is getting pretty flat (this has spooked some people), the fact of the matter is it hasn’t actually inverted quite yet, so that timer ’til the death of the bull market hasn’t started ticking.

Moreover, given Trump’s harsh criticisms of the Fed, I find it less likely that Fed chair Jerome Powell will stick with his hawkish trajectory by raising rates at a quicker pace than his predecessor. At this point, Trump is looking over Mr. Powell’s shoulder, so you have to think that Powell may be more inclined to act in a more accommodating fashion so that he doesn’t fall into Trump’s bad books.

The Fed is supposed to act independently from non-monetary policy matters, however, so if Powell continues the hikes in spite of the escalating trade war, he could theoretically invert the yield curve soon, marking the start of the countdown until the longest bull market in history ends.

Nobody knows what Powell’s going to do at this point, and if Trump’s able to influence his actions, the bull market could continue to roar for many more years to come. And if the trade war also comes to an end, the stock market could melt-up like the S&P 500 Index did to kick off 2018.

Further, a recent study conducted by BMO Capital Markets discovered that when the yield curve narrowed below 0.5% without inverting, the S&P 500 clocked in strong returns of 14.2% on average.

Talk about a fine line between ruin and riches!

While you may feel worried because the yield curve is close to inverting, I’d suggest becoming more of a skeptic instead of relying on potentially cherry-picked data from bearish analysts who’ll insist on impending doom as the markets soar.

Sure, the bull market is the oldest in history, and we’re overdue. And yes, the yield curve is flat, but that doesn’t mean it’s game over.

Foolish takeaway

Timing the markets is a horrible idea, so take economic projections with a grain of salt and stop wasting your time by looking to time your exit from the markets! One does not simply ride the bull market all the way to the peak and jump out before the pain happens. If you insist on it, the more likely scenario is that you’ll stand to miss out on huge gains.

I’d strongly urge investors to implement an “all-weather” strategy if they’re at all afraid about the state of the markets.

Stable, boring stocks like Shaw Communications Inc. (TSX:SJR.B)(NYSE:SJR) will continue paying out rich dividends (currently yielding 4.5%) when the markets finally do implode. And since it’s unlikely that a consumer will default on internet bills, Shaw’s operating cash flows will be far more resilient on average come the next plunge.

Stay hungry. Stay Foolish.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Joey Frenette owns shares of SHAW COMMUNICATIONS INC., CL.B, NV.

More on Tech Stocks

Investor wonders if it's safe to buy stocks now
Tech Stocks

Balancing the Risks and Rewards of Investing in AI Stocks

Choosing a safe AI stock can be challenging if you need help understanding the underlying technology, business model, and, by…

Read more »

An investor uses a tablet
Tech Stocks

1 Top Tech Stock That’s a Top Pick for Canadian Investors in November

Amazon (NASDAQ:AMZN) is a top AI stock that's on sale after a recent plunge off highs.

Read more »

investment research
Tech Stocks

Is OpenText Stock a Buy, Sell, or Hold for 2025?

Is OpenText stock poised for a 2025 comeback? AI ambitions, a 3.8% yield, and cash flow power make it a…

Read more »

The virtual button with the letters AI in a circle hovering above a keyboard, about to be clicked by a cursor.
Tech Stocks

Emerging Canadian AI Companies With Big Potential

These tech stocks are paving the way to an AI-filled future, but still offer enough growth ahead for a strong…

Read more »

Young Boy with Jet Pack Dreams of Flying
Tech Stocks

Is Constellation Software Stock a Buy, Sell, or Hold for 2025?

CSU stock has long been a strong option for high growth, high value stocks. But are there now too many…

Read more »

An investor uses a tablet
Tech Stocks

Canadian Tech Stocks to Buy Now for Future Gains

Not all tech stocks are created equal. In fact, these three are valuable options every investor should consider.

Read more »

dividend growth for passive income
Tech Stocks

2 Rapidly Growing Canadian Tech Stocks With Lots More Potential

Celestica (TSX:CLS) and Constellation Software (TSX:CSU) are Canadian tech darlings worth watching in the new year.

Read more »

BCE stock
Tech Stocks

10% Yield: Is BCE Stock a Good Buy?

The yield is bigger than it's ever been in the company's history. That might not be a good thing.

Read more »