The saying for the month of March is “in like a lion, out like a lamb”.  While this generally refers to the weather, it certainly didn’t apply to the stock market.  It didn’t even work that well this year with the weather, as some places were seeing snow after spring had already arrived.

For 2018, the saying may go, “in like a bull, out like a bear”.  It has been a volatile couple of months, and the first week of April did not see any more calm.  Stock markets were not only volatile from day to day, but extremely volatile within each day.  If you looked at the Dow at 10:00 EST in the morning, it was usually very different by the time the market closed at 4:00 that afternoon.

While it was a mix of up days and down days that mostly equaled out at the end of the week, it is a scary sign for what is ahead.  Higher volatility can often mean that a bigger crash is coming.

It is easy for the financial analysts to point out the growing economy.  The GDP has been positive, and the stock market was booming up until a couple of months ago.  The problem is that this is usually the case before a recession and before a stock market crash.

While the government gets most things wrong, the SEC disclaimer that “past performance is not indicative of future results” is accurate.  Just because the economy seemed to be doing well last year does not mean it will do well this year or next year.

Also, consider that, in the past, when stocks have tanked and gone into a bear market, they were usually up the year before.  When the Nasdaq went crazy in the late 1990s, it didn’t just stop and stay there for a while.  The volatility picked up, and it quickly started its descent.

While interest rates are still historically low, consider that the Fed stopped its monetary inflation in late 2014.  The pumped up stock market that relies on loose money is likely finally getting deflated from 3 and a half years of a relatively stable money supply.  If anything should surprise us, it is that it has taken this long for it to come.

One of the best indicators of recession is the inverted yield curve.  This is when long-term rates fall below short-term rates.  This has yet to take place.  This still makes me a little cautious about predicting an imminent recession.  At the same time, nearly everything has seemed to be unprecedented since the fall of 2008.  Maybe this time will be different and we will see a recession without an inverted yield curve.  Short-term rates are still very low by historical standards, so it makes it more difficult to get a flat or inverted yield curve.

It is also possible that we could see a bear market in stocks without actually seeing an official recession.  I find this scenario hard to believe, but it is technically possible.  We saw oil prices come crashing down in 2014 and 2015 without any kind of recession.  But it is hard to shake the feeling that stocks are tied to the economy more, at least in terms of this artificial boom.  It would be hard to imagine a major bubble in stocks popping without seeing GDP turn negative.  It is generally hard to deflate one bubble at a time, especially when that bubble is in such a huge arena.

Housing and stocks were both in a huge bubble in 2007.  The crash in housing had a bigger impact in terms of unemployment and living standards.  This time around, stocks are probably in a bigger bubble, but we should still expect housing prices to fall.  There are some regions with a massive housing bubble, but nationwide, I think the bubble in housing is less than it was over a decade ago.

I want to be clear that we should not necessarily hope against recession.  A recession is a liquidation of the bad investments that sprung up off of the loose money and artificially low interest rates.  It is a correction.  It is an attempt to realign resources in accordance with consumer demand, if the central bank and government will allow this realignment to fully take place.

The malinvestment has already occurred.  The best we can hope for is a quick liquidation of the malinvestment.  We need resources allocated in accordance with consumer demand.  This is what will create real wealth that is a priority for consumers.  This wealth generation is what raises our living standards.

In conclusion, you should fear the volatility in the sense that a bear market in stocks is getting closer.  And if we get an official bear market in stocks, we should expect a recession with it.  You should make your plans accordingly.

If you own stocks, ask yourself whether you would buy those stocks today if you didn’t own them.  That should tell you whether or not to sell, or how much to sell.

This high volatility is a gift to those paying attention who own stocks.  It is a chance to get off the train, or at least lighten the load, before it goes off the tracks.