8) Equity prices breaking down;
The list was developed over years of research, Cucchiaro said.
The flattening yield curve “is one of the most reliable indicators I’ve studied over centuries of time,” he told advisors at the event. “When short-term interest rates get higher than long-term rates, this squeezes liquidity out of the banking system, the economy and the markets.”
A rising TED spread was the most obvious indicator of the 2007-2008 crisis, Cucchiaro said, when the banking system came under stress beginning in 2007.
A drop in the stock market might seem like an obvious warning sign, but the mirror image of that, a “melt-up” in equities, can signal trouble as well. This happens when the stock market “goes up relentlessly, the correction never comes, people can’t take the pain of missing out [and] cash comes into the market” in a panicky rush, he said.
The next crisis could be trigged by the end of quantitative easing, which could end the run-up in asset prices, or by an unforeseen military conflict, Cucchiaro said.
Advisors can prepare for the next black swan by being well diversified and having allocations to high-quality long-duration bonds, real assets like gold and commodities, and cash.
Bonds guard against the risk of a recession; real assets protect against currency crises, geopolitical unrest and inflation; and cash is handy for credit contractions, which result in bargain prices for financial assets.