Frank Holmes: “Is This Just the Calm Before the Storm?”

Florence, now a tropical depression, made landfall in North Carolina on Friday, bringing with it destruction and calamity, the cost of which could top $170 billion, according to analytics firm CoreLogic. If so, that would make it the costliest storm ever to hit the U.S. To date, 2005’s Hurricane Katrina holds the top spot, costing an estimated $160 billion, followed by last year’s Harvey ($125 billion) and Maria ($90 billion).

Not to minimize the impact Florence will have on millions of Americans’ lives, but storms, even of this size, have rarely triggered major equity selloffs. According to research firm CFRA, in the last 15 years, the S&P 500 Index declined an average 0.2 percent in the month after a hurricane, but was up an average 3.9 percent in the subsequent three months. Home improvement companies such as Home Depot and Lowe’s could be beneficiaries, while insurance companies might take a hit.

Markets are subdued right now, with the S&P 500 having gone more than 55 days without a 1 percent move in either direction. Trading volumes are also lower-than-average, suggesting Wall Street is in wait-and-see mode before making major adjustments.

Could this just be the calm before the storm?

Consumers and Small Business Owners Are Feeling Good

Appropriately enough, Florence comes to us on the 10-year anniversary of Lehman Brothers’ collapse— the spark that set off the financial crisis—reminding us it’s never the wrong time to prepare for such a catastrophe. (I’ll have more to say on Lehman later.) That includes now, even as a raft of positive economic data was released last week. The University of Michigan consumer sentiment index climbed to 100.8 in September, against expectations of only 96.6. This was its second-highest reading since 2004.

What’s more, the NFIB Small Business Optimism Index soared to 108.8 in August, its highest level ever in the series’ 45-year history.

“As the tax and regulatory landscape changed, so did small business expectations and plans,” commented National Federation of Independent Business (NFIB) president and CEO Juanita Duggan.

Against this background, Nobel laureate Robert Shiller told Bloomberg last Thursday that the market “could get a lot higher before it comes down… It’s highly priced, but it could get much more highly priced. It’s a risky market now.”

Time to Get Defensive?

Ray Dalio has a slightly different perspective. The billionaire founder of Bridgewater Associates, the world’s largest hedge fund, reminded investors last week that we’re in the “seventh inning” right now, and as such, investors should probably get “more defensive.” Recently I shared with you that the global purchasing manager’s index (PMI) is steadily slowing down, falling to a 21-month low of 52.5 in August.

Again, markets have been relatively tranquil for a while now, but just as people on the East Coast were urged to prepare in anticipation of Florence, now might be the time to adjust your portfolio in advance of a possible market downturn. Last week, Goldman Sachs reported that its bull/bear indicator, which gauges the likelihood of a bear market, climbed to its highest point since 1969.

Goldman Bull Bear indicator at highest level since 1969

Goldman analysts point out, however, that the indicator could be read to mean not that a bear market is right around the corner, but that a period of lower returns could be expected.

One of the ways investors could batten down the hatches, so to speak, is with gold…

Full story at Frank Talk on usfunds.com