Market crashes are far more common in our imagination than in reality. This is because they are vivid and scary events. Given our evolution, we are wired to worry about these sorts of vivid events. While, this may have been useful in helping us avoid getting eaten by tigers, it's less useful for rational, disciplined stock market investing. By thinking this topic through now, hopefully you're a little better prepared when the next crash hits.
With that in mind, the fact is that the Buffett Indicator is at its highest point in history -- meaning that stocks have never been valued as high as they are now in terms of market cap to GDP. While this indicator doesn't necessarily mean that the tides will turn anytime in the near future, it may be a smart idea to start thinking a little defensively.
A little more than a week later, stocks sank after a tweet from the president challenged the idea that Russia’s missile defense system could shoot down American smart bombs. Investors clearly worry that Trump’s tweeted rhetoric could be taken the wrong way by one or more global leaders, leading to escalation, or even conflict. Should that happen, the stock market could tank.
No expert prediction or technical indicator is necessary. The makings of the next crash are already clear. Whether it’s Janet Yellen or Jerome Powell who will head the Federal Reserve after February 2018, interest rates can only move higher. At the current rate of debt, even 100 basis points (one percent) higher interest will mean $200.0 billion in additional (not all, mind you, just the extra bit) in debt.
With IL&FS getting closer to an absolute liquidity crunch and defaulting on its ICDs and CPs, the RBI has started tightening the vigilance on banks and other financial institutions. For starters, the RBI asked banks to be cautious about buying HFC bonds considering their exposure to IL&FS debt. IL&FS has outstanding debt to the tune of $12.5 billion and the market is rife with news that most of the HFCs have large exposure to IL&FS debt. Of course, the promoters of Indiabulls and DHFL have denied any exposure but the news refuses to go away. The mood was also sourced by a large Indian mutual fund selling DHFL bonds in the market at an above-market yield of almost 11%. That also took its toll on the markets.
Some enduring red flags, Filia said, are in the form of politics and geopolitics — growing populism across Europe as well as Middle East and Asian tensions. But more than that he sees shrinking liquidity — central bank spending flows in reverse for the first time in a decade — as the "first real crash test" for momentum and volatility, as well as rising interest rates.
For a few years now, the reason for fast rising home prices have been blamed on tight inventory. After seeing what has happened in Toronto, I’m starting to question these claims of tight inventory in almost all major housing markets (US and globally). In Toronto, within two weeks, they went from having very low inventory to having a 50% increase. Where did all of their extra inventory come from? Could the same happen to other major cities as well? It’s possible that there are low inventory in so many places due to aggressive investor speculation, which is then causing locals to panic buy. Very similar to the irrational exuberance happening before the housing crash 10 years ago. Something can trigger these property investors to sell all at the same time, and cause buyers to pull back, similar to what’s happening in Toronto. Another housing crash is possible, and it doesn’t have to be caused by bad loans like last time.
The economy had been growing for most of the Roaring Twenties. It was a technological golden age, as innovations such as the radio, automobile, aviation, telephone, and the power grid were deployed and adopted. Companies that had pioneered these advances, like Radio Corporation of America (RCA) and General Motors, saw their stocks soar. Financial corporations also did well, as Wall Street bankers floated mutual fund companies (then known as investment trusts) like the Goldman Sachs Trading Corporation. Investors were infatuated with the returns available in the stock market, especially by the use of leverage through margin debt.
Usually, HFT programs and computer trading works without a hitch. But once in a while problems do crop up. Back on Aug. 24, 2015, the United States’ three major stock indexes plunged on the open, but would recover much of their losses by midday. Among the reasons blamed for the dip were market makers and HFT traders. With so many stocks within the S&P 500 failing to open on time, and a number of exchange-traded funds under trading halts, HFTs and other high-speed traders shut down their systems, removing much-needed liquidity from the marketplace and exacerbating the early-day decline.
I am very frightened. This past June, I allowed a financial advisor to convince me that my portfolio made up of primarily stocks was risky for a retiree. I have been retired since 2005 and had held the same stocks since then. These stocks included 2 Canadian banks, BCE, TransAlta, and Emera. I was receiving dividends o $4,800 per year and all the stocks consistently raised their dividends. The financial advisor put me in2 costly mutual funds which proceeded to lose me $ 1800 within days and also swallowed up up my incoming dividends from the former portfolio. By the time I was down $6,000 I panicked and pulled out of the mutual funds. And! This was in 2017. What I have left and what I thought would carry me through my retirement is now in a money market making very little and I am terrified daily as to reinvesting it.
But if U.S. GDP growth were to falter -- let’s say dip to 1% or lower on an annual basis -- then it would be really difficult to support existing valuations for companies in the technology and biotech arenas. And since tech and biotech have played such a critical role over the past nine-plus years in pushing stocks higher, they could easily be responsible for dragging the stock market into a correction.
The crucial point of their paper was that sandpile avalanches could not be predicted, and not because of randomness (there was no random component in their model) or because the authors could not figure out how to come up with equations to describe it. Rather, they found it impossible in a fundamental sense to set up equations that would describe the sandpile model analytically, so there was no way to predict what the sandpile would do. The only way to observe its behavior was to set up the model in a computer and let it run.
Maybe Coca-Cola announced record earnings. Maybe it's the middle of the month, and your 401(k) contribution has just come out of your paycheck, so you automatically bought a fund or individual stocks. Maybe you've just retired, and you'd like to take 40 years of profits to pay off your mortgage, so you're selling some stocks. Maybe a stock hasn't gone anywhere for you, and you don't mind taking a little loss for the tax break. Maybe you found a bargain and you just can't wait to snap up a few shares. Maybe it's a stock bubble or stock valuations are running high.
There are two big caveats to realize. First, just because the Buffett Indicator signals that stocks are cheap doesn't mean that they won't get even cheaper. As you'll see in the chart in the next section, the Buffett Indicator didn't bottom out during the financial crisis until it was briefly below 50%. Conversely, just because the Buffett Indicator looks expensive (like it does now) doesn't mean that stocks can't continue to muscle higher.
— The Big Picture is Being Obscured By Short-Term Fears. "Animal Spirits" are ruling the stock market. Millions of investors are afraid that the torrent of cash created by low interest rates, hefty piles of corporate reserves and even more giveaways in the new U.S. tax code won't be enough to juice up a world economy (outside of the developing world) that may be slowing down.
Though the Trump administration has looked to tariffs to help balance out a huge trade deficit with China, these added costs on aluminum, steel, and potentially other Chinese goods, could come back to haunt businesses and U.S. consumers. As material costs rise as a result of tariffs, businesses have little choice but to pass along these higher costs to consumers. That will likely result in less consumption, and an eventual pullback in spending from businesses, which may lead to a borderline recession.
As you can see, there is more to preparing for a market crash than making a stock market crash prediction. “Experts” predict crashes all the time, and most of the time they get it wrong. If you listen to all these crash predictions, you will end up losing out on the upside. And yet, you should never be in a position where a crash will wipe out your portfolio or brokerage account. To prepare for a crash, you should make sure your portfolio is diversified, and that you don’t have too much of it allocated to high beta and growth stocks.
The Dow was already down 20 percent from its September 3 high, according to Yahoo Finance DJIA Historical Prices. That signaled a bear market. In late September, investors had been worried about massive declines in the British stock market. Investors in Clarence Hatry's company lost billions when they discovered he used fraudulent collateral to buy United Steel. A few days later, Great Britain's Chancellor of the Exchequer, Philip Snowden, described America's stock market as "a perfect orgy of speculation." The next day, U.S. newspapers agreed.
Jones is widely credited with predicting, and profiting, from the stock-market crash on Oct. 19, 1987, which saw the Dow lose nearly 23% of its value, marking the largest one-day percentage decline for the blue-chip benchmark in its history. Jones founded Tudor in 1980 and became known for trading everything from currencies to commodities. His record has featured middling returns and an exodus of billions from his hedge fund in more recent years. According to a Forbes list of billionaires, Jones boasts a net worth of $4.7 billion