In investing, diversification is essential in order to ensure that a market meltdown does not collapse an entire portfolio. For that reason, investors tend to put their money in stocks, bonds, real estate, commodities, and mutual funds to spread the risk across a number of assets. Even with diversification, it is important to identify the red flags of a market meltdown and be aware of the ever-changing market conditions. To some, the current market conditions are throwing off a few of those red flags.
Lindsey Piegza, Chief Economist for Stifel, stated on CNNMoney’s “Market Now” live show, “One of the biggest concerns is the housing market. It’s throwing up a very large red flag, maybe this 4% growth we saw in the second quarter is not sustainable.” Among the last five months, four have seen a decrease in home sales, despite the increase in housing prices. In June alone, the percent of resale homes sold decreased by .6%, housing starts decreased at a rate of 12%, and new home construction decreased by 5.3%. If people are buying homes, they are generally taking on a large amount of debt. Many people are simply not buying as they cannot take on the financial burden. In Piegza’s mind, the crash isn’t necessarily here, but the current conditions could definitely signal that it is approaching.
The crash seen in 2008 will be different than the one we could be walking into, according to Piegza. She believes that the low interest rates of the past years made individuals forget how dangerous it is to borrow money. In her words, “we are going back to a lot of the easy lending that we used to see.” As a whole, she firmly believes that the interest rates are a great predictor of a recession in the modern market. Just today, the Federal Reserve finished a two-day meeting where it confirmed that interest rates will probably be raised two more times this year. The raises will likely lead short-term rates to exceed long-term rates, thus inverting the yield curve. In the past, an inverted yield curve has preceded every recession in the modern history of America. Piegza expressed that there will also likely be pressure on the long-term rates to increase by the end of the year.
Notably, Piezga’s thought on an impending recession is not shared by Jerome Powell, the Federal Reserve’s Chairman. In recent interviews, he has expressed that he is not concerned with the inverted yield curve. His statement does not express the concerns about interest rates and housing in which Piegza firmly believes. In her mind, “we’re not there yet, but this is what led us to the housing crash.”