Stock Market Crash Soon?
There are skeptics who believe the surge in stock market prices is driven by foolish optimism, over-rated performance, and unrealistic valuations
The 2nd Covid 19 wave combined with no stimulus aid for big or small business, airlines, and 16 million unemployed could be two more seeds for a stock market crash and perhaps a housing market crash in 2021. As President Trump ended stimulus aid talks, the markets became fearful with a 1.3% drop. The NASDAQ, Dow Jones, and S&P were all down. This morning with Trump’s mention of independent action, markets are racing up again.
But the biggest concern is a Biden win in the Presidential election. The economy isn’t strong enough for what the Democrats have planned. Still, Goldman Sachs is offering up a rosy boom times scenario instead if the democrats win. The belief is they will spend $2 Trillion or more to stimulate a recovery.
As Jim Cramer wisely aid, the recovery can’t happen as long as social distancing is necessary. The idea of stimulus spending while 16 million are unemployed, businesses can’t open, mortgages are in danger, rents aren’t being paid, the cities on the verge of financial collapse seems fairly unrealistic to launch the economy.
Stimulus payments can only help create a bridge to the other side in 2021. The Republicans could still hold some power and create some Democrat style standoffs to stop them.
Why the Markets Could Crash in the next 3 Months:
- economy can’t boom because of social distancing requirements (restaurants, airlines, entertainment, hotels, transit)
- 2nd wave could be severe leading to shutdowns and medical disasters
- jobs can’t be created because demand is so poor for small business services
- recent sell-offs show investor confidence is shaky
- the Warren Buffet indicator signals a stock market crash is coming
- a crash would allow Billionaires to buy up real estate and or companies real cheap
- Trump is the champion of the stock market, and Dems are anti-business
- US and global markets jumped today on the news President Trump is out of the hospital
- a change in government creates economic stress and friction
- government debt around the world creating protectionism
- without continuous aid for the next 6 months, retail investors will need to sell stocks
- globalism is dead
- a return of China imports hurts US businesses and threatens to cause the USD to freefall
- experts have said stocks are grossly overvalued and due for a big correction
- large scale Covid 19 vaccinations won’t be ready until next summer 2021
- many Americans will refuse to get vaccinated
- democrats want to kill fracking which would create job losses and help raise oil and fuel prices
- the Fed itself has forced interest rates to near zero to save the economy (meaning Powell feels there is big trouble and weakness)
Additionally, the Democrat media themselves suggested the recovery was never real and the virus is a perpetual weight on everyone’s lives. The media has frequently said the stock market has no real connection to the economy. Yet, if it collapses like a house of cards, debts have to be called in and people have to be laid off.
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. Are investors just practicing responses to a future major selloff or crash? Could they push the panic button?
The Democrats have been keen on shutdowns and killing the economy because it may help their re-election bid while making President Trump look bad. He is the economy, stock market and jobs President. The Democrat agenda has been on higher taxes, shutdowns, greater imports, vaccination approval delays and over-regulation, and a return to the excessive regulation that strangled the USA suffered during the Obama era.
Without the Corona Virus (from China) the stock market and economy would be roaring much higher. The reality is though the China virus has done unbelievable damage at the most inopportune time. It’s effects might continue, however Pfizer just reported great news on their vaccine in trial — 800 out 0f 800 saw strong immune response.
So the virus news is good, but high taxes, high regulation, and deficit spending should worry investors. A 2nd wave is happening and it will suppress markets for a while. Until the vaccinations are distributed, there will be a suppression of the economy, leading to periodic losses of confidence (selloff).
Why the Optimism from US investors?
- economic data is stabilizing
- positive news on Covid 19 vaccine testing
- Europe is spending stimulus funds
- word of sanctions against China
- businesses reopening across the nation slowly
- businesses could run more profitably after the pandemic
- investment in treasury bonds (rising yields) shows a taste for risk
- travelers beginning to fly again
- Conference Board’s consumer confidence index rose to 86.6 this month from 85.7 in April
- home mortgage applications are increasing
- stock market investors are optimistic
- forecasts for stock prices in 2021 are for big recovery
- Feds may do more stimulus spending
- Fed chair wants to support the economy and keep interest rates low
There are concerns about a 2nd wave and mounting bankruptcies and the risk of a stock market crash are certainly present. Much of the sour viewpoints come from the big media outlets who tend to look only the points that support the “economy will crash” theory.
Big corporations such as Google, Apple, Facebook and Amazon reported record breaking profits, and their stocks are doing well,. Yet they are facing anti-trust challenges that could send them crashing at some point.
China’s Loss is the US Gain?
President Trump is still negotiating with China to let them export to the US again, but China will never agree to fair terms. If China was to find a way to buy US goods, then the specter of a US stock crash could return, along with unfair foreign competition for US companies.
China and the US looked seriously poised for a trade war. China’s aggressive push at Hong Kong and disrespect of Taiwan are sure to make the world reject China. The race to domestic production of goods, particularly critical goods is on in every country in the world. The economic failure of China is high right now and is one of the factors that the media refuses to explore.
The Corona Virus exposed a lot of issues with sole production in China. Many countries still don’t have PPE because China has hoarded it for their own people. They make no apologies for doing that in the face of interdependent trade deals. As the Wuhan virus surges past 350,000 deaths worldwide and rages in Brazil, the world community is deeply resentful of China’s communist regime.
A look at the chart below might make you think this big correction today might not be a significant event. And this is all in context of a roaring US economy.
One MSNBC commentator felt the market is beginning its transition away from International stocks such as FAANG stocks (Google, Facebook, Amazon) to domestic equity stocks. This graphic on the right shows US domestic stocks are gaining steam.
The slide is affecting NASDAQ, DOW Jones, S&P, TSX, and all major indices and some experts are calling for a further hefty correction due to global trade relations. Yet with $2 trillion in US tax cuts and protective tariffs, you’d have to wonder why US investors would be nervous.
Further fed spending is in the planning stage.
Volatility: Here we go again. The Vix is lighting up of late.
In early February, the US stock markets including the Dow Jones, NASDAQ, and the S&P fell 5% to 10%. The Dow plummeted 1600 on Monday the worst single day correction in its history.
Will this persistent volatility on the DOW, NASDAQ, S&P, FTSE, and TSX become a contagion that affects other markets such as the housing markets? People used the big loss day on Monday as a marker, but perhaps tomorrow will be a new marker?
As an investor, do you need to know the causes of the volatility and correction? Right now, the market has recovered and the US dollar is gaining strength. Yet trade deal turbulence could cause a wobble in global markets. The world is still dependent on the US economy.
The Economy is Okay: How Could a Crash Possibly Happen?
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 mini crash on those days, it appears the slide was quietly caused by AI trading bots working for large funds.
Looking Into Corrections and Crashes
This post delves briefly into the theory and factors involved in market crashes, 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, NASDAQ and TSX fell hard during both correction events this year, something CNBC’s Jim Cramer calls “Flash Crashes.”
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 2020. Other forecasters refer to government reactions and policies as the key determinant or crash factor. You’ll hear them in the videos below.
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 crash.
Could we say this crash will be like a series of wobbly dominoes that begin falling, while overconfident officials feel they can reach out and stop the crashing tiles?
Some are looking at the housing market as ripe for a crash. There’s been persistent rumors of crashes in Chicago, Miami, Denver, Seattle, New York, Los Angeles, San Francisco, Toronto and Vancouver up in Canada. Yet none of these markets could crash easily. 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 crash. 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?
What do the Historical Stock Timeline Charts Say?
This chart of the S&P index shows market crashes are uncommon.
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 2020.
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.
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AI Systems may Panic without Emotion
Artificial intelligence systems, trading algorithms, or AI predictive programs may even be more prone to panic because their actions are actually irrational. They may sell lightning fast without any reference to long term value.
In fact, such AI algorithms are so complex, the programmers can’t figure out how the AI systems are making their decisions. AI systems can’t describe why they make their decisions either.
The AI systems are increasingly autonomous, taking cues from market activity yet not really knowing what the activity means on a human emotional level. AI systems don’t really understand the human element of international trade and politics. Geopolitical risk is a major factor today.
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.
Seriously, Could US Stock Markets Crash?
All positive economic cycles generally end with some sort of rapid descent, just like a roller coaster. That descent at the end is the rush out just like a stampede. It’s completely desperate and irrational.
Long term, everything returns to the equilibrium point. The stock market crash is the point where investors lose all confidence and decide to pull their money out pronto. Sell, Sell, Sell.
As a million dollar home owner or prospective buyer, or mortgage holder watching mortgage rates, you’re wondering when this record long economic boom will end.
An important signal is desperate buyers jumping into the housing market at excessively inflated prices, overly indebted and leveraged, they fall hard when the panic button gets pushed.
Cheap Financing Overcomes a Blocking of Housing Supply
When governments prohibit land development, it makes home prices rocket. More millennials wanting/needing homes, high immigration, rising income, low interest rates, cheap mortgages all together create the drive to buy a home.
Scenario: Big money chases few homes, and when governments persist in stopping or not supporting land development, speculators become more confident prices will rise further. Then a politician or FED president steps in with their reactive solution, at the end of the business cycle where employment and profits will begin to drop. Speculators/investors pull out fast, and the slide begins.
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.
President Trump’s recent tax revamp is going to extend the cycle for sure. Yet that provides more time for the bubble and “crash factors” to form like clouds on a beautiful sunny day.
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 research on investor/debtor mimicry is worth a read too.
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 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 stock market crashes and housing crashes. 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.
Let’s say Warren Buffet sells a huge array of stocks suddenly. That combined with news about an impending war, poor jobs report, and fast rising interest rates, could be all it takes.
None of the research however, seems to be applied to human expectations, human happiness, and human panic. Human’s don’t pay attention to historical trends and data, nor what AI systems advise. They generally pay attention to now just like herding animals before a stampede. The signal that sets the herd off, could be one or two animals stumbling over a pothole.
The final analysis would reveal that people sell stocks and housing when they believe strongly the market is heading down. That’s when the wealthy and speculative investors check out en masse.
With stock market prices and housing prices at record highs, even uneducated investors and home owners would be vulnerable to bad news and false outlooks.
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.
The latest theory of RR Reversal has it that all markets suffer a pullback of 10 to 40%. So empirical data and events are the basis of future action.
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 by AI systems and human investment advisors.
When the panic button gets pushed this time, it will be the shock wave before the tsunami.
Even if we turn everything over to artificial intelligence systems, our global economy is new. The AI systems are seeing a new environment with new players. Chinese buyers and investors think differently than US bankers or European politicians. And a herd of 1.5 billion panickers is a scary thought.
Given the battle between Trump and his enemies, it’s an emotional environment that fuels income for news media. As you know, they need sensationalism to pay their bills. That smoke screen is enough to keep people off balance and insensitive to the real investment issues. At some point, in emotional confusion, the stampede could take place.
Most forecasting models don’t go beyond 2020 or 2024, and that in itself might give you pause for thought. The fact that investors, homebuyers, and corporations can’t visualize 2 years ahead is worrisome, especially since experts have access to all the data.
Too many forecasters, economists, and business people look at data, but is data just a false cue and where everyone reacts too late?
Robert Shiller himself isn’t alarmed at the CASE ratio. He suggests that investors diversify their investments. That would help allay panic type behavior.
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.
Here’s a BIG list of housing market crash 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 loud crash?
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Note: 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.