Shares to Buy

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Despite the fact that we’ve only lived through it for 18 years, the 21st century has brought on some changes that has completely transformed how we live our lives, for better or for worse. The introduction of the iPhone, Google’s Android and 4G mobile network technology has completely changed how we use the internet. Japan’s Earthquake Early Warning (EEW) system too was considered effective in keeping the 2011 Tohoku earthquake to a minimum.

There are a couple of things technology hasn’t helped however. Locating a wide-body aircraft weighing more than a hundred tons that was lost at sea still proved impossible. Despite the tools the best Wall Street firms had access to; the majority of them weren’t able to predict the 2008 housing market crash. When it comes to the stock market, knowing the right Australian shares to buy is only half the battle, the other half is knowing when to buy and perhaps more importantly, when to sell them.

The bull market and the bear market

In industry speak the bull market is when asset prices are on the rise. Conversely, the bear market is when prices continually decline, or in other words, when the market is in a recession. Recession is different from a crash in that the decline is much slower and more gradual over a longer period of time while in a market crash, prices fall sharply in a short period of time. The two phenomenons however are deeply interconnected since a crash is usually followed by a recession.

Understanding current market positions and when it’s going to change is elementary to the practice of both investing and trading. The consensus around the industry is that it’s impossible to accurately predict when a crash is going to happen but as we’ve seen in the 2015 film The Big Short, in which a couple investors managed to correctly predict the 2008 global financial crisis and make billions of dollars in the meantime, that’s not necessarily true.

While it’s true that it’s impossible to pinpoint the actual time frame of an impending crash or a recession, there are indicators we could use to see if the market is in a healthy state or not. They’re not always reliable and the timing might be off by a couple of years but based on what past history has told us, they can still be useful. Here are three indicators that investors need to watch out for when it comes to the market.

The yield curve in the bond market

The bond market is generally bigger than the stock market and at least looking over the economics history of the United States, there’s one indicator in the bond market that preceded a market crash within less than three years. The yield curve, or more to the point, the difference between the yield on 10-year and 2-year US government bonds has signaled recessions three times in the past two decades.

Generally, when the yield spread is low or even when the yield curve is inverted, i.e. when short-term yields exceed long-term yields, that’s a sign that a recession might be around the corner. In the United States, the yield curve inverted in 1998, 2001 and 2005, with each followed by a recession within 3 years. As of right now, the curve isn’t inverted, but it has been progressively moving in that direction for the past three years or so.

Unemployment rate

Consumer spending makes up the majority of the economy and when consumer spending power is low, usually marked by low employment, the economy grinds to a halt. The current trend of gig economy, where people transitions in-and-out of employment rather frequently, partly explains why unemployment rates keep declining but at some point, it will come to a point when unemployment won’t go any lower, at which point it would rise, which could signal a recession.

Real estate prices

This partly correlates to the point above. Real estate prices operate by demand and when the economy is strong; the demand would rise, which would also prop up real estate prices. When the economy is weak, demand would also fall, causing real estate prices to go on a free fall. It should be noted however that there are times in which real estate prices start falling after the recession hits.

The stock market by comparison is usually much more volatile than the three indicators described above, which is why investors shouldn’t use it as an indicator. Ups-and-downs, rallies and corrections happen far too often with stocks that might double as false alarms with recessions. Generally, investors should look at three indicators above collectively. One of them being true might be a false alarm, two should give you cause for concern while all three should make you consider funneling your investment into defensive stocks.

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