What does that mean for lenders?

As this long summer stretch ends, you can bet investors will be pouring over their portfolios. Just a year ago many bearish prognosticators thought the Dow certainly could not sustain its momentum through the first half of 2018, only to be proven wrong. As of this writing, the Dow is up over 5 percent from its position at the start of the year, bumping up against the 26,000 mark.

But bears are bears; they don’t growl silently. In fact, there are quite a few signs in the marketplace that suggest an end to this long bull run.

Here are five indicators that suggest we are nearing an inflection point. For private lenders and leaders in the construction and real estate industry, the key is to keep close tabs on these indicators. If a correction should come, it’s important to be able to identify the signs before the talking heads on your favorite business network are telling you it’s too late.

The yield curve for Treasury notes is flattening.

There’s no sign of any changes in the Federal Reserve’s policy to steadily tighten monetary policy. It raised interest rates in June and signaled that two more rate increases are expected later this year. These rate hikes continue to flatten the “yield curve,” the spread between the yield on the 10-year and 2-year U.S. Treasury notes, and this is a concern.

In normal times, 10-year T-notes should have a much higher yield than 2-year T-notes to reward investors for tying up their money for a longer period. A flattening curve can happen for several reasons, but it’s always a red flag for investors. If short-term yields go higher than the long-term yields—a condition called inversion—a recession almost always follows.

While we’ve been occupied with the end of summer vacation, the 2-year yield nosed up to 2.63 percent, while the 10-year yield remained flat at 2.82 percent. This squeezed the spread between them to just 19 basis points, the lowest in 12 years.

The European Central Bank is also ending quantitative easing.

The Fed isn’t the only central bank reversing its policy of making huge liquidity injections into the economy. Earlier this summer, the European Central Bank (ECB) announced a plan to taper its massive asset purchases at the start of this month—and end them completely by December. Like the Fed, the ECB is worried about the risk of inflation, which it wants to see below 2 percent for the medium term.

As all this liquidity exits the markets, it’s difficult to predict the exact impact on the stock market. The continent had a notable slowdown in growth beginning at the start of the year, mostly blamed on the uncertainty around the U.S. economic sanctions and trade war. But with interest rates climbing and the end of quantitative easing, it is very likely that aftershocks will be felt in all the major markets.

The Administration’s trade war with China may get out of hand.

Speaking of trade wars, here’s a quick reminder of how this began: In April of this year, the U.S. imposed tariffs on steel and aluminum imports from China, fulfilling one of the president’s earliest campaign promises. Then on July 6, the U.S. imposed a 25 percent tariff on $34 billion worth of Chinese goods, which then led China to retaliate with its own new tariffs on imports from the U.S.

Just four days later the stakes were raised again. The administration directed the U.S. trade representative to publish a list of $200 billion in additional Chinese goods that are subject to a newly proposed 10 percent tariff, which could slow Chinese economic growth by as much as 0.5 percent.

The $200 billion is not an insignificant amount. In the first half of 2018, the U.S. imported $250 billion in goods from China in total while exporting $64 billion to them, a $186 billion trade deficit. That makes it tempting to kid ourselves that the Chinese will be forced to concede. The danger is that such tariffs, if implemented, risk pushing Beijing to take its so-called “nuclear route” by using two nuclear buttons—devaluing their currency and dumping U.S. Treasurys.

A devalued yuan would make Chinese exports even more attractive to the global market. American businesses that already struggle to compete due to today’s artificially low yuan would be deeply undercut on price. That would also be detrimental to the equities markets.

A Chinese dumping of U.S. Treasuries would also wreak havoc. Certainly the Fed can snap up Treasuries—the U.S. government is the largest buyer of its own debt, thanks to the Social Security trust—but the Chinese government holds $1.2 trillion in U.S. federal debt, about 9 percent of America’s $13 trillion total public debt. That means interest rates need to rise even further than the Fed currently plans to allow it to absorb the slack.

Consumers are deeper in debt just as rates are rising.

According to the New York Federal Reserve, as of June 30, 2018, consumers owed a total $13.29 trillion in debt, an $82 billion (0.6%) increase from the first quarter of 2018. Overall household debt is now 19.2 percent higher than its low point of 2013.

Interest rates are rising in the parts of the economy that hit consumers in the wallet. This includes adjustable rate mortgages, car and student loans, and variable-rate debt like credit cards. Lenders may have been lulled into a false sense of security by low mortgage defaults. And while that is true, the debt per borrower for the average mortgage has been ticking up steadily, increasing from $196,772 in the first quarter of 2017 to $202,470 in the first quarter of 2018.

Consumers are heavily relying on credit cards. Revolving and non-revolving debt is currently at $3.86 trillion, according to LendingTree. In the month of May alone it jumped by over $16 billion, the largest single monthly increase in 22 years. At this rate, Lending Tree predicts it will pass $4 trillion by the end of the year. The average credit card APR is currently 15.54 percent, a full percentage point higher than a year ago. As the federal funds rates move up, rates on all this consumer debt will naturally go up too, and defaults will follow.

Tech unicorns that don’t make money smell a bit like dotcom 1.0.

Losses among newly public companies are concerning in a rising interest rate environment. Fintech darling Square has been having a rally lately, with its stock soaring above $85 after being at $25.90 at the end of August 2017. While Square boasts great revenue growth, it basically does not make money. The same is true for Snapchat’s parent Snap Inc., which went public a year ago, and reported losses in fourth quarter 2017 that doubled from a year earlier.

It’s not just the consumer-facing tech companies that lose money. Nearly 30 percent of new NASDAQ companies are biotechnology firms that come to market well before they have an approved drug. They’re capitalized more on hope than profits.

It may be unfair to compare these companies to Pets.com or Webvan. Today’s unprofitable tech darlings have significantly more traction in terms of users and revenue growth than the dotcom 1.0 cohort. But it bears watching how these golden stocks fare in the rising interest rate environment.

Your extra indicator—there’s that certain election coming in November.

Yes, we cannot talk about the markets without mentioning the elephant and donkey in the room. It would come as no surprise if the markets turn out to have priced in a Democratic House takeover. But subsequent events like impeachment and the fruition of the Mueller investigation have the potential to cause cascading waves of instability.

Lenders and participants in the construction and real estate industries need to filter the noise from the signals when it comes to the markets. Bull markets often end in fits and starts, and any given week’s reassuring rally can quickly devolve into a rapid plunge. Keep a close eye on the five indicators above. (The sixth indicator you cannot avoid even if you wanted to.) The Chinese have an old curse, “May you live in interesting times.” For this bull market, it’s quite fair to say we are heading into interesting times. ∞