Transcription
It's happened at least three times in the last 100 years: a president is elected on the heels of one of the biggest stock market rallies in history, with the S&P 500 hitting all-time highs. In a lot of ways, those previous three times mirror the current economic situation.
The question is: will this time be different, or is it happening again? It seems as though we may be on the verge of a president who is otherwise considered to be good for the economy stepping into a situation where there is nothing but downside.
In this video, I'm going to discuss what led up to those previous stock market crashes just months after the elections, the parallels between then and today, whether or not this time will be different, and if it isn't, how you can prepare to make sure that you don't find yourself financially destroyed.
But before we get into it, my name is Nolan Maas, and if you want the truth—the real truth—about personal finance and economics, this is the place for you. If you believe that there is opportunity in crisis, then go ahead and hit that subscribe button so more people like you can see this video.
Okay, so let's get into it. Let's discuss what has happened previously in history and whether or not we are on the cusp of yet another devastating economic recession that even the president cannot prevent.
Let's start by taking a look at history. In the 1920s, there was Hoover; in the 1970s, there was Nixon; in the early 2000s, there was Bush; and now, most recently, there is Trump. All of these presidents have been elected on the heels of the greatest stock market rally in history, with the S&P 500 hitting all-time highs.
I want to start this video by prefacing that nobody is a fortune teller. Anyone on the internet who is making these videos about the next stock market crash or the financial crisis that is right around the corner is essentially making a guess. Historically, economists are really good at predicting 50% to 200% of the last three or four recessions because there are often surprises in the economy. But that doesn't mean that the past doesn't leave clues.
Take, for example, those three eras. After Hoover, Nixon, and Bush were elected, all of which suffered devastating recessions mere months after the elections, the stock markets fell significantly almost overnight. Ironically, in each one of these situations, Hoover, Nixon, and Bush were all considered to be presidents that would be significantly better for the economy than the alternative. But in all three cases, the damage was done long before they took office, and no matter what they did, there was no stopping the inevitable.
When you look at the Nixon and Bush eras specifically, you can see from the bottom chart here that consumer confidence was quite high when they took office, only to turn quite quickly as the economy went into the well, proverbial downturn.
What's interesting is when you look at today: Donald Trump is taking control at the all-time highs of the S&P 500. Now, this is not abnormal; it is normal for the market to hit all-time highs on a fairly regular basis. In fact, in 2024 alone, the S&P 500 hit all-time highs at least 50 times.
However, what isn't normal is for consumer confidence to be as low as it is today. If you take a look at the current numbers, you can see that consumer confidence is at the lowest it's been in quite some time. Ironically, though the S&P 500 is hitting all-time highs, it doesn't make a lot of sense—except when you look at the fact that inflation has led to higher prices, which has led to inflated profits, which is causing the S&P 500 to increase.
However, that doesn't mean that there aren't storm clouds on the horizon. Even though it's largely considered that interest rates are about to come down, if you look back in history at the Nixon, Bush, and Trump eras, we see that in all three eras, interest rates have come off lows and come back to a 5% to 6% range. This is an indicator that in all of these scenarios, the economy was booming leading up to those highs in the S&P 500.
But when the Federal Reserve increased its interest rates in the same way that they did in the previous two eras to curb inflation, it leads to what's called an inverted yield curve. This is when the yellow line, which is the difference between the 2-year and the 10-year bond, turns negative.
As you can see from this chart, in all three instances when the Federal Reserve started reducing interest rates and subsequently the yield curve uninverted, that was a key indicator that a recession was right around the corner. It seems as though history might just be repeating itself today.
One of the scariest pieces of data in economics today, at least in my opinion, is when you graph the yield curve versus unemployment. The two charts almost identically mirror each other, and currently, we are seeing that yield curve un-invert, which means if history is true, we should start to see unemployment increase as well.
If unemployment begins to increase, that is a sign that we are in the early stages of a recession. This has happened before in recent memory. We've seen the stock market on at least four separate occasions hit all-time highs—this isn't including the Hoover and Nixon days—only to see it come down substantially as we entered a recession.
Now, the stock market is not the indicator that tells us a recession is coming, but the stock market does, in fact, react to recessionary signals—things like the yield curve un-inverting and unemployment increasing, which are both things that we see happening right now.
That leads us to a rule—an economic rule—that predicts a recession almost 100% of the time. It's called the Sam Rule. The Sam Rule states that when the 3-month moving average of the national unemployment rate is 0.5 percentage points or more above its low over the prior 12 months, we're in the early months of a recession.
If you graph out the Sam Rule as of right now, what you can see is that in the same way that it increased in the 1980s, the 1990s, the early 2000s leading up to the financial crisis in 2008, and in the first couple of months of COVID, it is once again on the rise, indicating that a recession could be right around the corner.
So even though Trump campaigned on tariffs in the same way that Hoover did, and lower taxes like Bush and Nixon, his business-friendly stance doesn't mean that a recession is going to be avoided.
Now, is there a chance that we could avoid a recession? Yes, absolutely. But in the cases of Hoover, Nixon, and Bush, one single individual was not enough to turn the tide. The question is: will Trump be enough to turn the tide himself? The answer is: nobody knows. But the indicators are suggesting that we need to prepare for the worst.
Now, here's the thing about investing: if you prepare for the worst and you reduce your exposure to risk, you are highly unlikely to suffer the same losses that many people face. Just think about great investors like Ray Dalio and Warren Buffett. They don't stop investing; they don't jump into the popular investments of the day. They buy high-value investments that they know will perform well even if the economy falters.
If the economy does falter and the S&P 500 drops, they set up their portfolios in a way that they have the buying power to go in and buy all of the investments that are on fire sale at a discount.
Now, if all the people out there who are making these YouTube videos really knew what they were doing and could really predict the future, well, they wouldn't need to make the YouTube videos. Not only that, they would be wealthy beyond imagination. The reality is they're probably wrong. The reality is I'm probably wrong.
But the lesson that we can learn is to use the paranoia to reduce our risk. Reducing our risk doesn't mean pumping all of our money into Bitcoin or gold because investing in one or two things is the reason why people lose fortunes when the economy turns.
Instead, the best thing you can do is not follow the crowd but diversify your investments and hedge for risk. From everything I've learned over the last 20 years, there are two ways to do that: you either follow an investment strategy like Warren Buffett, where you invest in stocks that have significant value, or you follow an investing strategy like Ray Dalio, where you diversify for risk.
If you do either of those two things, you should be able to protect yourself from the storm. Now, it's significantly harder to invest like Buffett. If we could all do it, we'd all be rich. But the Ray Dalio All-Weather Portfolio, which he has talked about in several of his books and on YouTube, seems to be the single best investment strategy to reduce risk in times where there could be a significant downturn in the economy.
This portfolio is quite simply diversified based on the actual risk associated with different types of investments. The strategy suggests that you should invest about 7.5% in broad commodities and gold. By the way, if you are going to invest in gold, you can watch my video on why you shouldn't invest in physical gold and silver.
Then, invest about 30% of your portfolio in large U.S. cap stocks, 15% in short-term treasury notes, and 40% in long-term treasury bonds. What this asset mix does is reduce exposure to any one asset class, meaning that when the economy does turn, the drawdowns that are expected are significantly lower.
When you look at the All-Weather Portfolio versus global equities over the last 50 years, what you can see is that the All-Weather Portfolio is very much the steady Eddie. Even though there are times like today where straight equity investing can outperform the All-Weather Portfolio, there's almost inevitably a crash, a recession, or something that leads to a significant drawdown in equities.
By looking at the bottom graph, which is a graph of the drawdowns, you can see that the red line—global equities—are significantly more volatile than the blue line, which is the All-Weather Portfolio. This is why the All-Weather Portfolio outperforms almost every other type of investment strategy over the long term. It's because it follows the number one rule of investing: don't lose money.
The way that you lose money is by pumping all of your money into something like gold, Bitcoin, or individual stocks like Apple and Tesla. Diversification is what reduces the risk and creates the long-term returns that are almost guaranteed.
Now, if you don't have an investment portfolio—let's say you're not at the point where you're in savings mode and investing mode yet—there are some other things that you can do in order to protect yourself from an upcoming recession, whether it's today, a year from now, three years from now, or five years from now.
Those things are really quite simple: spend significantly less than you make. If you can't do that, you probably need to either focus on making more money or changing your lifestyle significantly. Then, get rid of as much debt as possible. The only debt that somebody should be carrying, at least in my opinion, is a mortgage on a property that they can afford for the long term.
By the way, if that mortgage payment is a significant portion of your income, you may want to look at downsizing because more than likely, the house that you have is far more house than you actually need.
It's important that you consider the fact that the economy at some point will turn, and what you do today will determine just how bad it is for you and your family.
So, leaving this video, the one thing you need to be doing is taking action. And by the way, if you are watching this video on YouTube, the algorithm is incredibly intelligent and thinks that you should probably be watching this one as well.