Investors need to take these harbingers of doom seriously!

Bryan Williams highlights some indicators of approaching declines in returns from the stock market.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

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Image source: Getty Images.

To be fair, there has been quite an impressive run for the FTSE 100 over the last decade. During the sombre events of the financial crisis in 2008, the index reached a lowly 4,000. Since then, the FTSE 100 has climbed up to its current level of around 7,500.

This enormous gain has, I’m sure, put a cheery smile on many an investor’s face. What some commentators are describing as the longest bull run in history is, however, showing worrying signs of drawing to a close…

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Yield curve

In recent months, the most talked-about signal of a slowdown has been the inverted yield curve. In brief, an inverted yield curve is a very unusual interest rate phenomenon in which long-term bonds have a lower yield than short-term bonds of the same credit quality, which is the complete reverse of normal.

An inverted yield curve has been a very accurate predictor of recent economic downturns. Those investors with long memories can testify that an inverted yield curve preceded the recessions beginning in 1980, 1990, 2001 and 2008.  And we have just had an inverted yield curve!

Government bonds

Can you imagine giving your money to someone to do with as they choose and having to pay that person to accept your cash? Think that is crazy? Think again, because that is exactly what is happening in the government bond market at the moment.

With very few exceptions, two-year government bond rates for European countries are negative. Take Switzerland for instance: the yield for these bonds is about minus 0.85%. Even for Slovenian bonds, you will get around minus 0.45%.

Why, you may well ask, are big-money investors prepared to pay a government to take care of their cash? What do they know that small investors don’t? The fact that interest rates are in negative territory is a disconcerting and worrisome sign indeed.

The European picture

The recent announcement by The European Central Bank (ECB) to add fresh monetary stimulus to the flagging European economy was also deeply troubling.

Those who have read my article on gold will understand that the price of the metal rises when there is severe uncertainty about the direction the stock market is heading. Upon the disclosure of the impending stimulus, the price of gold went parabolic, rising from $1,350 an ounce to reach a peak of around $1,450 an ounce in just a few days.

The briefing by the ECB included a hint that the already negative benchmark interest rate of minus 0.4% may actually be reduced still further! In addition to the inverted yield curve, the action of central banks lowering interest rates is another leading indicator of future poor returns for stocks.

Now what?

It is possible that the world economy is about to go pear shaped since many credible alarm bells are suggesting that markets are heading south. Still, a trade deal announcement at the G20 summit in Japan may give a welcome reassuring boost for investors. Nonetheless, if you are apprehensive about the future direction of shares, there are relatively safe stocks in the UK market I believe may weather a storm.

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Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Should you invest the value of your investment may rise or fall and your Capital is at Risk. Before investing your individual circumstances should be considered, so you should consider taking independent financial advice.

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