When is the Next Stock Market Correction?

Predicting the next stock market crash is never easy. So many economic, political, and international trade factors and more, are difficult to predict.

We might think any mention of a stock market crash is pessimistic.  Yet awareness of the factors that precede a crash is important for pensioners, over-leveraged investors, frightened fund managers, options traders, and others who might not be able to deal with a market failure.

With interest rates rising, housing sales cooling, China production shut downs, Fed balance sheet tightening, consumer sentiment dropping, price earnings ratios too high, wages and jobs too positive, and the dollar racing upward in value, there’s plenty of reasons to consider the possibility of a major slide.

Here we are after all that pandemic stimulus with the government saying they’re trying to cool inflation, yet they are spending more and calling it “anti-inflation spending.”  2022 played out poorly for the markets with even energy investors taking it on the chin. We have to say this next 3 months will be scary for investors. And 2023 may be the year, the ball finally drops on the market.

The algorithmic trading and worried self-directed investors, the slide scenario get more real.  The more realistic call is for a 2023 crash, yet current trends are threatening the summer recover everyone is expecting.  If fuel prices remain high and another Fed rate hike must happen, it could be a rough summer.

And as Russia’s economy collapses and further weakness in the foundation of the US economy is exposed, this over-priced market is suddenly on the edge.  With Putin’s threats against western nations, and China angered over US protection of Taiwan, the political dangers aren’t considered real by many Americans.

A forecast of a stock market crash really pivots on how the US and European governments must react given the circumstances. And Europe’s situation is way worse given their dependence on Russian natural gas. Could that contagion cross the Atlantic?  What political knee jerk reactions could send Europe’s tumbling?

I’ve always forecasted 2023 as the year stocks take a big dive, but the war is pushing things forward.  Any election scenario that keeps the Dems in control means supplies are damaged, business investment is poorly supported, no tax breaks will appear, energy costs will rise further, and continuous issues with Russia and China are certain.

Put all these in a pot, and set it to boil. When does it spill over?  Mostly likely 2023?

Rising Interest Rates Often Induce Recessions

Rising interest rates always preceded a recession and most housing market crashes. Goldman Sachs new GDP forecast of 1.7% is sobering and they see a recession as 35% likely.  Corporate profits appear to be aided by recession, until the peak where interest rates jump, spending stops, and stock values plunge. Once that avalanche begins, no government policy can save it. Biden can’t stimulate the economy, he can only destroy it.

If Biden’s last inflation control mechanism is to raise interest rates, then recession is the logical result.  Because investment is discouraged, additional supply won’t be his savior. Inflation has become a big issue, with many Americans not being able to handle the $300 a month increase. Millions of impoverished people are suffering.

Andrew Slimmon of Morgan Stanley believes a 10% to 15% correction is coming this year.  He says to be ready for this drop, ready to buy high beta, low risk value stocks. Goldman Sachs has predicted a 35% chance of a recession.

Even Jeremy Grantham is being interviewed now, and he’s been calling for a crash for many, many years. The boy who cried wolf is howling. Could the stock market bubble possibly burst?  If Fed stimulus inflated it, then we’re already into the correction.  Every plunge that occurs, weakens confidence overall.  At some point, retail investors then fund managers may make sudden selling moves and the slide could begin.

Previously mentioned hedging strategies with the best stocks would have helped investors avoid some pain. But choosing sectors and stocks is tough when everything’s giving. Even oil stocks are down. This week’s earnings reports if bad, could really send the market into downward spiral.  Certainly February and March earnings won’t be great.

With further Fed stimulus uncertain, the US economy is coasting on fumes and might struggle to reach the recovery without major correction. The Dow, S&P and NASDAQ are well down again today after a bad week. There is real concern as for a recession. No one really considered war and trade embargoes to enter the stock market forecast picture.

Investors viewpoint on the economy has changed. High inflation on top of high commodity prices and a housing market that’s driven by speculation and ridiculous highs funded by stimulus money suggests we’re past the peak now and in for a thrill ride downward.

If you dig into the top 26 crash factors, listed below you’ll find a large array of signals. If they are irrelevant, then you have nothing to fear.  Given the US economy has been recovering well, and the world is recovering slowly, most experts have offered no warnings of stock sell offs, emphasized hedging strategies, or advised on buy the dip opportunities. Then Putin attacked the Ukraine, and is doing viciously, something experts said would not happen.

Take a closer look at the best stocks to buy, the updated stock market forecast and the most recent buy the dip opportunities. Of course, the buy the dip stock buying opportunities will likely increase next week.

The Threat of the New Covid Variants

The BA Covid variant is a growing in the US, but moreso in China where governments shut down big cities and production facilities.

Cryptocurrency such as Bitcoin Ethereum and Dogecoin were sitting on the precipice too as I said, and they’re as risky an investment as anything (Bitcoin dove to $32k today).  You could look at cryptocurrency as a potential stock crash accelerator.  Pharma and vaccine stocks might not be the belle of the ball anymore. Time moves on.

Stock Market Crash Timeline

If you’re looking for stock market historical timeline events, I wonder if you’re going to have a front row seat to the next one. There is so much economic, political, cultural and health turmoil happening, that it’s as volatile as any period in American history.

History charts won’t help.  The 1929, 1987, 2000, 2007 crashes were unique, with unique factors that combined in a fateful sequence.

You need to look at current stock market signals and make a decision.  Forget about the stock market historical timeline charts, they won’t help you with investing decisions for the bear market this winter.  You should be reading voraciously about market trends, signals, corporate earnings, virus trends, government debt default, and political actors. Even rising interest rates don’t create an immediate threat although 2022 could see rapid rises. Crashes are caused by key accelerants.

Will This Threat Blow Over?

Corporate earnings reports are strong, the economy is reopening despite supply constraints, worker shortages, and strong inflation.  Earnings reports were perhaps the strongest factor easing fears of a market setback. Earnings were expected and forecast by experts to be strong in 2022 too.  Yet, conditions right now are creating doubt.

We saw the airlines sector, hotels, restaurants, and cruiselines begin to rise, but traveler confidence and border shutdowns could ruin the 2022 party now.

Keep in mind, in a couple of weeks, the US government debt ceiling limits will be hit, and the current administration only has enough funds to last 4 more weeks, before a government shutdown.

Other forecasters aren’t fazed by recent earnings, jobs and rising prices. They look at many of the crash factors you’ll see below, and they believe the weight of it is too much. Like the snowpack on a mountain top, it just takes a few rumbles to start a slide.

US Government — Debt Ceiling Woes

As you read the full investigation of stock market plunge potential threat to you and your investments, consider that the one thing that appears to break at some point is only doing so under the weight of so many threats.

The current US government is trying to reconfigure the USA through debt financing solely and at the same time not paying heed to the dangers of killing off the oil industry, gasoline powered vehicles, and allowing the Saudi’s to dictate the price of oil.

What could cause a stock market crash or a housing bubble to burst this year or next?  There are plenty of threats, not the least of which is assets priced out of reach. Bad decisions from the current US administration, rising interest rates, and inflation and an oil price shock.  A tax leap for corporations also could begin the avalanche.

Andrew was right, it’s happening!

Andrew Slimmon of Morgan Stanley believes a 10% to 15% correction is coming this year.  He says to be ready for this drop, ready to buy high beta, low risk value stocks. Now in September 2022, Slimmon got it right.  We’ll be looking for his 2023 forecast.

Ryan Nauman, market strategist at Informa Financial Intelligence, told Yahoo Finance. “One of the reasons why we have seen markets pull back the last couple days and trading volume has been light over the past couple weeks are … I think, that there is a lot of froth. There is excessive exuberance out there.

The P/E ratios of the last year bear no resemblance to stocks real worth.  As this chart reveals, stocks are overvalued, and may become even further overvalued this summer. We’re not yet at the peak of a .com slide, but it’s moving closer. With stimulus cash, we’d have to think this one will go higher.

And with the end of the pandemic, inflation will be hard to control. Everyone’s warning about it, but few are listening. The real danger, the number one factor, is the current US President.  Government regulation, tax jumps, trade wars with China, open borders, crushed US energy production leaves the US with record debt loads.  The trade deficit with China is pushing towards $1 trillion per year, and the US remains grossly dependent on this communist-led regime.

As long as stimulus money is flowing, the stock market and housing markets look rosy.  In 2023, the tap might be turned off with big rises in taxes, interest rates, and cutbacks in government services.

If the markets do plummet in the next 3 months, which stocks will be sold off first?  Cyclicals?

What Leads to a Stock Market Crash?

  • P/E ratios are double the S&P historic average
  • lower stimulus spending as small business still hasn’t relaunched
  • interest rate rises too fast causing shockwaves
  • extreme volatility shakes conservative investors confidence
  • supply chain stoppages kill trade and jobs
  • markets hit their peak and money leaves the US markets for better returns elsewhere
  • big tax hikes on corporations and billionaires hits harder than anyone realizes
  • big state taxes in California, Illinois, California and several other states will see wealthy people leave
  • wealth Americans avoid US taxes any way they can – invest in Mexico, China, Indonesia, Vietnam, Brazil
  • trade deficit pushes toward $1 trillion pushing government into revenue crisis
  • unemployment moves back up given China is too competitive and controlling of markets
  • democrats kill fracking which would create job losses and it raises oil and fuel prices
  • the Fed is forced to push interest rates up to support government bonds and treasury sales
  • rising interest rates reduce profit and increase bankruptcies and foreclosures
  • pension funds fail as stimulus for them ends this year

The Dow Jones forecast, S&P forecast, and NASDAQ forecasts are positive the last 3 months (see chart below) but the recent selloffs are a concern.

Why the Optimism from US investors?

  1. economic data is growing strong – 10% this year
  2. positive news on Covid 19 vaccine testing
  3. Europe is spending stimulus funds
  4. word of sanctions against China
  5. businesses reopening across the nation slowly
  6. businesses could run more profitably after the pandemic
  7. investment in treasury bonds (rising yields) shows a taste for risk
  8. travelers beginning to fly again
  9. Conference Board’s consumer confidence index rose to 86.6 this month from 85.7 in April
  10. home mortgage applications are increasing
  11. stock market investors are optimistic
  12. forecasts for stock prices in 2021 are for big recovery
  13. Feds may do more stimulus spending
  14. Fed chair wants to support the economy and keep interest rates low

Since we can’t rely on experts to predict up against today’s unique circumstances, risks, and changing trade relations, we should try to understand it ourselves and create our own 1 to 5 year forecasts.

The Economy is Okay: How Could this Bubble Burst?

Experts believe the February 2018 stock correction was due to Fed Interest rate intentions (are they really fighting inflation or creating it?).  Or was it ETFs or AI guided trading bots? Since there was no emotion before the correction on those days, it appears the slide was quietly caused by AI trading bots working for large funds. Let’s hope that problem doesn’t resurface.

Looking Into Corrections and Crashes

This post delves briefly into the theory and factors involved in market corrections and selloffs including investor expectations and mood, FED decisions, government meddling and AI systems (Note: even the people who make Artificial intelligence and self-learning algorithms have admitted they don’t understand how the AI systems make decisions. They learn and make decisions independent of human input and may not be  able to report to humans how and why they acted).

As time passes and bots do more of the trading, human investors are left with fewer clues as to what is moving the markets and when it’s  time to get out. That fear could lead to panic selling next time.

Global stock markets were deeply impacted in the last few days, letting everyone know that markets are connected, even the housing market.

The Dow, S&P and NASDAQ all hit new record highs in 2017 and stock valuations were very high, perhaps too high to justify. The volatility of Bitcoin and Pot stocks might be worth mentioning because a few are suggesting it cause trouble for the stock markets. Many investors don’t seem to know what Bitcoin, Bitcoin stocks, or any cryptocurrency assets are worth.

And given how complex markets, businesses, and computer trading is, investors really don’t know what could happen.

Will the Market Bubble Collapse?

Some experts suggest a stock market bubble is about to burst sometime between now and 2023.

Some even point to the fact that Warren Buffet is sitting on a mountain of cash rather than holding stock.  And his stock market indicator is pointing to a correction.  Could we say this event will be like a series of wobbly dominoes that begin falling, while overconfident officials feel they can reach out and stop the cascading tiles?

There’s been persistent rumors of corrections in ChicagoMiami, Denver, Seattle, New York, Los Angeles, San Francisco, Toronto and Vancouver up in Canada.  Yet none of these markets could slide easily. Too much demand. The economy is okay and there are too many people who need homes.

Too Much Overvaluation, Optimism and Growth?

Some experts cite the euphoria of stock markets during their bull runs. They suggest the heightened unrealistic expectations create a platform for disaster and when reality strikes, truth launches panicked sell offs. Some say the overvalued stocks, economy, and general optimism present right is a sure predecessor of a slide. It may have been that way in 1987.

Stock values have reached levels not seen since those two disasters and a correction would throw the world economy – currently seeing an ongoing boom period – into disarray — news report.

Stock prices and housing prices have ridden on a tide of low interest rates, demographic changes, government stimulation, foreign trade, technology, and more. At the end of a long business cycle, consumers are satiated. But do consumers have all they want? Are investors ready to leave US stock markets for gold and currency?

Economic indicators are traditionally used to identify potential crashes. Check out these top 6.  Are investors so optimistic that economic data can be disregarded?

Is What Happened in Previous Market Collapses Relevant?

Bearish experts will rely on history, and history likely will side with a crash outcome in 2022.

The following day, Black Tuesday, was a day of chaos. Forced to liquidate their stocks because of margin calls, overextended investors flooded the exchange with sell orders. The Dow fell 30.57 points to close at 230.07 on that day. The glamour stocks of the age saw their values plummet. Across the two days, the Dow Jones Industrial Average fell 23% – from Wikipedia

Panic – Where Reasoning Disappears

Panic emotions of investors and government leaders is the X Factor. Today, markets are driven by computer algorithms that act faster, and still ultimately controlled by emotional humans. If you’ve ever seen a stampede, you probably can visualize the events in 1929. Some are thinking that computer aided panic is what might happen.

Sharing is Good for your Social Health!

If thinking about a US stock market crash is too difficult to visualize, you might consider selling soon. Getting greedy is one additional sign of irrational thinking that’s driving stock markets and housing markets currently.

Housing markets are key because real estate has been driving the economy for awhile. A bursting housing bubble could launch the landslide that takes down the stock markets.

Will the Housing Market Collapse Too?

Home prices are now around record levels, but there is low unemployment, low mortgage rates, and a huge population hoping to own. That’s desperation. Enter cheap financing companies giving buyers a hope at ownership, just like 2007, and a housing market collapse.

Business cycles form just like cold weather fronts over the prairies. They end in storms.

Have a read of Wikipedia’s description of market cycles and the various theories of why markets collapse and you’ll be more certain that they could indeed happen. From MIT’s inverse cubic power law, to chaos theory, researchers focus on the mathematical and technical elements.

The Blind following the Blind

People follow each other blindly like they were tailgating each other on a high speed highway. If anything happens, there’s going to be a chain reaction crash. The surge of self-directed investors too is one factor a few experts have noted.

The way the expert describe mimicry however makes it look like everyone abandoning ship so are they mimicking others, or just jumping off the ship at the same time? However, the fact investors simply copy others buying and investing behaviors makes the abandonment more likely.

The research suggests mimicry was present in most big stock market and housing market slides. The predictive behavior is nervousness about the market, followed by mimicry, followed by panic. That panic could be set off by anything because of investor/owner anxiety.

Political Risks are Still a Factor

Major geopolitical actions might actually mean nothing materially for the markets, but if interpreted otherwise, it could start a slide that governments couldn’t stop.

Given the success of political correctness, fake news, and social media pressure, it’s not hard to see a big pull back driven by emotional investors and buyers. That could launch political reaction which magnifies the issue.

As good as prognosis the US economy has, there are a lot of human emotional factors that could launch a recession. Let’s not forget that we’re a long way into this business cycle. The end is surely in sight. While not everyone is satiated and ready to stop spending, many wealthy people are.

The wealthy have unusually powerful vote about trends. When they pull out of the economy, that news will be heard.  When the panic button gets pushed this time, it will be the shock wave before the tsunami.

The Stock Market Crash Accelerators and Signals

Paying attention to economic changes and other signals could give you forewarning of what could happen from 2018 to 2020. If relying solely on professional stock market experts and news stories would not be wise. As the overall indicators move relentlessly high, it might provide a clear signal that market is cresting, and will head back down to equilibrium.

One clear signal might be excess in demand which draws money and government reaction.

Key Factors to look for:

  • stock prices at record levels
  • government passes complicated new tax bills that confuse and make investors uncertain
  • geopolitical events disturb international trade relationships and flow of goods/money
  • inflation and wages rise faster
  • housing prices peak
  • consumer product surpluses
  • natural end of a long business cycle
  • stock price to earnings ration too high (Shiller Pace is above 30)
  • misery index rises (unemployment rate + inflation rate)
  • the NAAIM index is too high (professional investors optimism)
  • growing market fear that may induce panic (investment advisors, market experts, bloggers)
  • assets have peaked in profit performance and wealthy begin to unload
  • too much consumer debt combined with risky investments (housing) and rising unemployment
  • corporate-Equities-to-GDP Ratio
  • accidental or emotional timing of government fiscal events (China preventing funds exodus)
  • key corporate failures in financial sector (bank, mortgage company, investment firm)

When do you think this current bull run in the markets will end? Will it be soft or a hard crash?

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Disclaimer:  The statements and information presented in this post is not intended as professional investment advice. It is solely an exploration of stock investing and the risks, perils, and behavior of stock markets and the economy. No one should rely on a single source of information or a single stock market and investing professional’s advice.  The overall message of the post might be to diversify stock, real estate, and cash/gold holdings as a hedge against stock market crashes.  Investors should look into hedging strategies but be aware that even hedging may provide limited protection from a crash.