So, we are finally at the inflection point I've been predicting for almost 3 years. Back then, I was involved with some commercial real estate stuff and that market was breaking due to elevated interest rates that moved up much faster and farther than the industry forecasted. However, because commercial real estate loans are multi-year borrowing, most in the industry felt it would be the 2nd half of 2025 when the industry finally started flushing out the bulk of the bad loans. That's been happening for awhile now and probably will reach its peak in the coming months/year. As a result, I really felt the stock market and the economy would hit a rough patch in late 2025.
In parallel, we have the AI hype bubble finally starting to get exposed. We've all seen all the ridiculous proclamations that AI would be doing 80% of software coding by this year. That was and is a ridiculous proposition, and is similar to the internet hype that occured during the internet bubble of 2000. This bubble is not as bad as 2000, but things are definitely frothy. A very good company, Databricks, just closed financing at $100B valuation. $100B! Look for this bubble to burst over the next several months/year.
In parallel, companies have been doing a good job of generating earnings. We have excessive government spending keeping that gravy train moving. That is a good counter-balance to getting into a recession, but the problem is that it is making the whole financial system even more shaky, including long-term interest rates. However, that trend can go for awhile until some world event somehow breaks the confidence of the markets.
The Trump administration is doing everything it can, unintentionally, to destroy the economy in the near-term: tariffs, fewer immigrants for jobs, pissing off allies and trade partners, etc. These stagflation policies need to end up as mostly a bunch of huffing and puffing, rather than actual implementation, or it will drag the economy into a recession. The problem is that its starting to look like the real deal. These elevated prices will hit in the next 12 months, tap out the consumer, and hurt corporate earnings, possibly throwing us into recession.
We can't spend our way out of the next recession like in 2020. While the lowering of interest rates will help quite a bit, the government can't just toss trillions at us this time around. That means a slow, methodical recovery that will take 24-36 months. However, I don't see a deep recession, because government spending helps and frankly Trump does have the mindset of trying to juice the economy any way he can, so eventually he will panic over the current government policy missteps and correct them.
Finally, September and October are always vulnerable months for many reasons.
From an investment standpoint, I'd buckle down and be prepared to hold equity assets for 24-36 months, with corrections of 15-25%. If you have a lot of cash, it's tricky. Intermediate and long-term bonds would be the normal play, but with stagflation still a possibility, it's difficult to make that bet. You could lose 12-18 percent of your principal for years in that scenario. So I'm not quite sure where to invest cash.