When you look at the economic signposts right now, every arrow is flashing caution – but most investors are skating full-speed toward the edge. The reason my worry peaks over the next six months is simple: this window marks the last stretch before the policy train turns, liquidity gushes, and the Fed finds itself under new management eager to feed the lower-rates crowd. It’s the “in-between” that’s most dangerous.
For context, by mid-2026, we’ll have the “one big, beautiful bill” providing fiscal thrust, and a Federal Reserve answering to the Trump/Bessent team – two levers sure to pump money and push rates down. But from here until then, markets face the tightest conditions since the early Reagan and Volcker days.
Here’s what’s different – and worth real risk management right now:
Liquidity is parched: With the Fed holding rates near cycle highs, the cost of money for Main Street sits at truly oppressive levels: 6.3% for mortgages, 7% for cars, 7–8% for business credit, 14% for SBA loans, and 20% APR for credit cards. Quill Intelligence and 42 Macro note hedge fund borrowings (repo and prime brokerage) topping $2.5 trillion – a market propped up by high-stakes leverage, not organic capital. In my experience, when volatility jumps or margins widen, forced selling will hit fast, no matter what the headlines say.
Labor is cracking: Quill points to the NFIB “Poor Sales” six-month average at 10% – the highest in four years, and a classic precursor to surging unemployment. ADP’s weekly job data is negative, and the Trend Unemployment Tracker (TUT) just flashed a 2.7 percentage point jump: historically, a lead indicator for jobless spikes matching every major recession since 1990.
Positioning is at extremes: AAII sentiment data shows retail stock exposure at 91% with cash holdings at an anemic 4%. These numbers scream “euphoria,” aligning almost perfectly with the peaks of every cycle for the last 40 years. Typically, they marked the moment to reduce risk, not rev up. (Source: 42 Macro)
Valuations are stretched: S&P 500 price to next 12 months EPS sits in the 96th percentile, higher than any previous market peak over the past four decades, again courtesy of 42 Macro. When everyone in the pool is long and the water is shallow, history tells us the drop can be steep.
Credit Risk: Warning signs from the opaque $2 to $3 trillion AUM private credit market are starting to appear. Over the last several weeks, we have seen several cases of fraud, default, and write-downs of these loans, with more than just wealthy individuals taking losses – the wider financial system having exposure. Echoing these concerns, DoubleLine Capital founder Jeffrey Gundlach recently warned, “the next big crisis in the financial markets is going to be private credit. It has the same trappings as subprime mortgage repackaging had back in 2006”. It’s too early to tell if this is just the tip of the iceberg, but the known unknowns here merit caution in risk taking.
Why 6 Months?
Because it’s precisely this six-month wedge – leading into the election, the arrival of major fiscal stimulus, and the anticipated shift at the Fed – where policy will remain tight, markets are vulnerable to forced deleveraging, and high valuations run out of buyers. After that, the policy pendulum swings the other way, unleashing debasement-fueled rallies and the “money train” flooding risk assets.
What’s the actionable playbook?
- Rebalance now: Cut equity exposure; aim for a portfolio with one-third in stocks, well below consensus.
- Active hedges: Use puts, inverse ETFs, tactical cash allocations. This isn’t a time for heroics.
- Avoid faux bonds: High yield is just equity masquerading as bonds; a crowded trade that will unwind with stocks.
- Stay liquid: Build cash for forced selling windows and eventual pivot opportunities.
These are moves for asymmetric risk. Yes, the probability of a full-on crash is not in the majority – but when both positioning (AAII at 91% stocks) and valuation (S&P at 96th percentile) are screaming peak, a minority risk carries maximum impact.
The next six months could be the toughest since the Fed’s last tightening cycle, and the setup for the greatest debasement-driven bull run in a generation. Manage risk now, so you’re ready to ride the rally when liquidity, policy, and leadership finally pivot.