Stock Market Crash?
The mini-correction on Friday and Monday, seems to be reversing itself, but is this whip saw volatility in the stock market warning us of confidence issues with investors?
As economists and forecasters argue over which factors, from over-leveraged investment to cryptocurrency challenges to banks, to interest rate fear mongers, to trade debt mountaineers could possibly be the straw that breaks the market’s back.
The Democrats are 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.
Competing with China (which has little pandemic debt) will be very difficult and the trade deficit is growing fast. Much of the stimulus funds will end up bubbling the stock market and end up as investments in China’s economy which offers much more attractive P/E ratios and earnings. There are threats that aren’t even listed below as yet, however I will revise this post to keep you on top of the stock market crash topic.
Is this really a stock market bubble fueled by foolish optimism, over-rated performance, stimulus funds, and unrealistic valuations? Or should you keep pouring your money into stocks? Will there be a stock market crash?
Let’s explore the topic because you should be an expert on this. Here’s 13 crash indicators you should begin watching.
What could cause a stock market crash or a housing market crash this year or next? There are plenty of threats, not the least of which is assets priced out of reach. Bad decisions from the Biden administration, rising interest rates, and inflation and an oil price shock. A tax leap for corporations also could begin the avalanche.
Housing Market Historic Crash Timeline
And is this the roaring twenties all over again? There are corollaries between then and now. Stock market experts and economists cite technical details while the real factor might go under their radar. It’s human emotion – optimism, joy, euphoria, what Robert Shiller calls “irrational exuberance.”
And on the flip side, is panic the only thing you need to fear? Could big profit taking be a slide-initiating event? Is a big market weakness showing up one day enough to launch the crash? If some bull experts pull back their horns and send out warnings, will that do it?
Today, speaking on CNBC with Mellisa Lee, Morgan Stanley’s Mike Wilson says ‘time is ticking’ on a market correction within the next three months. He says it could happen via an equity risk premium blow out or interest rates rise.
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.
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 crash, 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 Joe Biden. 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.
Most governments in this out of control situation typically overreact — when public outcries over the the cost of living, housing prices, and suffering becomes too much to ignore. The Biden admin is desperate for legitimacy, and the look of power. Conflicts with China are serious, which is why Biden hasn’t responded to many of the horrible things that country has done lately. At some point, there is a day of reckoning.
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. Could a housing market crash lead to a stock market crash? It did in 2007. The market is plagued with a lot of irrational exuberance.
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
- government talks lead to lower stimulus spending
- 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. Are investors just practicing responses to a future major stock market selloff or crash? Could they push the panic button?
Why the Optimism from US investors?
- economic data is growing strong – 10% this year
- 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
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 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. 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 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 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 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?
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, plummeting 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.
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
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 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 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.
Nervous Investors Focus on Now
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 to start a panic (Internet, social media).
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.
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.
Political Risks are 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.
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. If the US crashes, Europe is next, followed by China. And a herd of 1.4 billion Chinese panickers is a scary thought.
Most forecasting models don’t go beyond 2021 or 2024, and that in itself might give you pause for thought. The fact that investors, homebuyers, and corporations can’t visualize 5 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?
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.