The Stock Market Just Flashed a Warning Signal That’s Been Right 83% of the Time Since 1960. Here’s My Plan.

Investors are borrowing more from their portfolios, increasing margin debt by 49% in the past year, which could signal an impending market downturn. According to Fundstrat Global Advisors, when margin debt surges by more than 45% year-over-year since 1960, the market has declined in five out of six cases, or 83% of the time. Despite this warning sign, the reporter is not panic-selling but instead making a strategic plan to protect their portfolio and take advantage of potential opportunities.

The reporter highlights that historically, surging margin debt has preceded a market decline, with the S&P 500 declining by 4.2% on average over the next 12 months following a 40% surge in margin debt. They also note that rising margin debt exacerbates selling when the market declines, causing further market losses. The reporter mentions other cautionary signs, such as the CAPE ratio hitting a second-highest record reading and past market declines after the Federal Reserve begins a rate-hike cycle.

To mitigate the risks, the reporter is building cash by selling lower-conviction holdings and being more selective in new investments. They prefer low-volatility options like dividend-paying stocks, particularly those with a history of dividend growth. The Schwab U.S. Dividend Equity ETF (SCHD) is a top choice, offering a 3% yield and holding top dividend stocks with an average five-year dividend growth rate of more than 9%.

The reporter adds that Procter & Gamble (PG), a Dividend King with 70 years of consecutive dividend increases, is an ideal defensive holding during uncertain times due to its durable revenue, attractive valuation, and high yield. By trimming lower-conviction positions and focusing on dividend growth stocks, the reporter aims to cushion potential market downturns while still maintaining upside potential.