Why Is The Stock Market Crashing?

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Ten years have passed since the end of the global financial crisis of 2008. The US has currently had the most extended period of economic growth, which has surpassed the Internet boom at the end of the last century. In 2009 the annual growth rate due to the financial crisis and the recession was -1.68%.  In the last ten years, we have seen the economy resurrect itself from the ashes of the financial meltdown that occurred with an average annual growth rate of  2.71%.

However, fundamental economic indicators so convincing, some analysts are predicting a market correction of 70% this year. 2018 was the year with the highest volatility in the stock market during the last ten years and is a sign of instability. If the US economy falls into recession, the stock market will most probably crash.

Presently, the consideration by most is that stocks and other assets are overvalued based on current data. Present stock prices have remained at record levels, which indicates that they are overvalued. Some experts claim that many stocks are overrated in excess of 80%.

Regardless of when the next collapse or stock market correction occurs, history has shown us that overpricing of shares never ends well. During the Great Depression in 1929, stock prices fell to 10% from their previous highs. An example of this is when the market crashed in 1987 by more than 20% in just a day.

Another disturbing indicator is the increase in interest rates. Since 2015, the Federal Reserve has increased interest rates eight times. Although these measures have a goal of curbing inflation, they hold consumer expenditure. Also, the rapid increase of disbursed bank credits and subprime loans preceded every stock market crash in the past. So, fears of a stock market crash in 2019 are becoming a harbinger.

Three Predictors to the Stock Market Crashing

First, the US government has a severe debt problem, and experts call this indicator a “debt bomb”. The US national debt was $22.1 trillion in March 2019. The overall economic situation in the US is unstable. The growth rate of the economy is not too high, at least in relation to the trillions of dollars invested after 2008 in the form of economic incentives.

These incentives were given to investment banks and the companies who profited from the sub-prime lending crisis and were deemed to be on the verge of insolvency. These investment banks and risk institutions were considered “too big to fail”.  The U.S government at taxpayer expense did what it deemed was necessary to save the world economy and U.S financial institutions as well as the U.S dollar to the tune of a 700 billion dollar bailout to these institutions.

The second predictor is “the trade war” between the US and China, Brexit of Great Britain, and the lower business growth in many countries of the world. The International Monetary Fund (IMF) has suggested that these are the essential reasons for the world economic slowdown. The IMF has reduced its forecast for global economic growth to 3.5% in 2019. This is below its previously indicated estimate of 3.7% in 2018.

Some of this stemmed from China’s reluctance to address trade issues regarding intellectual property, trade practices in their country and their status at the WTO.  China has so far refused to relinquish its status as a developing country at the WTO even though evidence suggests they surpassed this indicator a decade ago.

Foreign businesses investing in China objected to Chinas practice of local partnerships and relinquishment intellectual property in order to do business in China.  In simple terms, the world wanted to address these issues without harming one of the largest consumer economies in the world.  In the era of the Trump administration, this became more economically pugilistic and took shape in the form of a trade war and retaliatory tariffs.

The third indicator of a potential stock market crash is the highest level of stock volatility and overpricing occurred in 2018 and 2019. These facts lend evidence to the late stage of the economic cycle in the US. The recession probability index for the US economy now stands at 23.6%. However, we can expect a stock market crash or a significant correction in 2019 or 2020.

Overpricing stocks as an indicator will not be easily identified if you are looking at the S&P 500.  Instead, look to new or recent markets established to gain insight such as the stocks related to cannabis or tech-related to 5G and networking systems as indicators.

To understand when the next recession and stock market crash will occur, analysts have suggested paying close attention to stringent economic indicators, including income, employment, business growth, and GDP. Unfortunately, when these indicators flash red, it will be too late. As soon as the US economy goes into recession, the stock market will respond very quickly.

How to Avoid Losing Money When Stock Market Is Crashing

Over the past 50 years, stocks used to fall more than 20% seven times. we also knew about 19 corrections when the S&P 500 dropped more than 10% from its peak level. During these periods, traders and investors tried to keep their funds in hard assets such as gold or treasury bonds, which were supported by the US government, or even in reserve currencies, such as European euro or Japanese yen.

The problem is that investors are trying to protect their money after the market correction has already begun. They start selling stocks at the most inopportune moment. However, they need to stay calm when stock prices fall and take measures in advance. A right way for hedging investor’s portfolio is to select a limited number of stocks and hold them for a long time.

When the stock prices drop, it is better to buy shares even more. Then, traders should keep not only stocks and bonds, but also other assets, such as dividend shares, real estate shares, peer-to-peer loans, and crowdfunding investments, which will help mitigate the possible losses. Real estate is always in demand, and it is valuable even when markets inevitably fall.

Stock markets usually recover within five to ten years after a crash. So, a wise strategy focusing on long-term investment goals is needed. Every trader can decide how much keep in stocks, bonds, and real estate to survive hard times and ensure sufficient profit.

It is essential to select the right balance between stocks and bonds, and you can start with 70/30 as a baseline. It is also possible to invest in inexpensive index funds and keep money in FDIC insured accounts.

Dave Muree

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