The current "perfect" world of an eighth year of rising stock prices, a steady economy and unusual investor complacency provides an ideal time for investors to sell their shares before an unexpected shock spurs a major decline or a move to a bear market, according to the Wall Street Journal. Even as the major U.S. market indexes, most notably the S&P 500 (SPX), the Dow Jones Industrial Average (DJIA) and the Nasdaq Composite (IXIC), continue to soar into record territory, the exceptionally calm CBOE Volatility Index (VIX) points to an unhealthy level of investor confidence amid a rising number of warning signs.

Beware the Bear, Goldilocks

The U.S. in 2017 is experiencing a "Goldilocks" economy of low inflation and stable economic growth similar to the 1990s, the Journal says, and many investors believe that only a recession can trigger a bear market. This is a badly mistaken assumption, the Journal says.

First, 20% declines in the stock market, the commonly accepted definition of a bear market, sometimes occur when the economy is not in recession, with 1966 and 1987 as two notable examples from the post-World War II era, the Journal reports. Second, a financial crash can send the economy into recession. For a very recent example, the subprime mortgage meltdown that began in 2007 is generally recognized as a key trigger for the ensuing 2008 financial crisis, which, in turn, helped to exacerbate the Great Recession, the worst economic downturn since the Great Depression of the 1930s. 

The late economist Hyman Minsky observed that the longer a financial cycle lasts, the greater are the odds that it will lead to excess and a traumatic end, the Journal adds. A bull market in stocks certainly is an example of a financial cycle. Finally, economic forecasters still have yet to develop a reliable method for predicting when recessions will begin. (For more, see also: 4 Reasons You Should Worry About the U.S. Economy.)

As far as the placid readings on the VIX are concerned, the Journal finds this to be cause for concern in itself. "The frothier the market, the less bad an unexpected event has to be to shake confidence," the Journal says. (For more, see also: S&P Could Fall 8% by Year-End, Wells Fargo Says.)

Other Warning Signs

Strategists have cited a growing list of signs that the bull market is aging, if not near an end, including the stock market's narrow leadership by the big tech stocks as well as investors' increasing willingness to invest in riskier securities. Other indicators are that the 12-month forward price-earnings ratio (P/E) for listed companies is at its highest level since 2004, according to data from Thomson Reuters Corp. (TRI) charted by the Journal. Though still well below its level during the Dotcom Bubble years of the late 1990s, this barometer is above its average value since the mid-1980s, and even higher than it was prior to the 1987 stock market crash.

High debt loads among U.S. corporations constitute another warning sign. For nonfinancial U.S. companies, the aggregate net debt to EBITDA ratio is down slightly from a recent quarterly peak in 2016, but still is near its highest level since the mid-1980s, per Thomson as charted by the Journal. As this ratio rises, a company has a lower margin of safety to meet payment obligations on its debt. This, in turn, makes a recession that crimps revenues and profits needed to pay debt even more worrisome. (For more, see also: (For more, see also: Why Consumers Are the Biggest Threat to the Economy.)

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