Stocks are trading at all-time highs, thanks in large part to the low interest rate environment, overly generous monetary stimulus, and investor euphoria about expected strong post-pandemic economic growth. But a large number of economic indicators show that stocks are seriously over-valued, and, according to some on Wall Street, stocks could crash as much as 60% over the coming months. If so, that would wipe out eight years of gains.
What Could Force the Stock Market to Crash 60%?
According to some analysts, stocks need to correct by as much as 60% to be considered fairly valued, by historical standards. A stock market crash of that magnitude isn’t going to happen over night, but a major correction is coming.
The first wave could start this summer.
This might seem overly dramatic, what with the U.S. posting solid economic growth, but the U.S. and even the Canadian economy appears to be doing so well because of fiscal stimulus and cheap borrowing. These policies, which are intended to help juice the economy, are now simply hiding how slow real economic growth has been over the last 10-years or so.
Central banks around the world stepped in during the Great Recession to prevent another Great Depression. Lending rates and money printing has been going on since then. COVID-19 was just another excuse to keep the easy money flowing.
Now, massive government debt, stocks in bubble territory, and demographic trends have created weakness in global financial markets. But again, you wouldn’t know by looking simply at the stock market, because its at record levels.
But there are other indicators out there that are flashing warning signs. First, cryptocurrencies, in particular Bitcoin, is the mother of all bubbles, and has become a major indicator for the broader stock market. Bitcoin has lost roughly 50% of its value since hitting record highs in April.
On top of that, in the face of stock market momentum, fundamentals have been weak, which, historically, points to the end of a cycle.
There are a number of well-regarded valuation indicators that point to the same thing. The S&P 500’s valuation is approximately 200% above fair value. The gap between earnings and share price of S&P 500-listed companies is at its widest in at least 30 years.
In addition to valuation there are other indicators that point to a stock market crash. The rate of inflation is spiking. In April, the Consumer Price Index (CPI) jumped by 0.8%, the biggest monthly gain in over a decade. On a year-over-year basis it was up 4.2%.
It got worse in May, with inflation rising 0.6%, the second biggest jump in more than a decade. The CPI pounced 5% from a year ago, the largest increase since August 2008.
Historically, the higher the price to earnings ratio is, the closer to 0% inflation we are. But that isn’t happening. Inflation is above 4% and stock valuations are in nosebleed territory.
Inflation is dangerous because it forces interest rates to spike, which gives investors more reason to leave the stock market and buy bonds.
Learn-To-Trade.com, Canada’s Leader in Stock Market Trading Courses
Stocks are at record levels, but investors seem to have forgotten that they don’t always go up. There needs to be a reason for stocks to climb higher and a reason for stocks to go lower. Right now, the evidence points to limited upside and greater potential for massive downside. The trading experts at Learn-To-Trade.com understand that stock market crashes aren’t permanent though. It’s a reset that provides investors with a huge window of opportunity.
Learn-To-Trade.com is Canada’s oldest and leading provider of stock market trading courses. Over the years, we’ve taught thousands of investors, of every skill level, how to read economic cycles, spot market trends, and become confident traders that profit more consistently.
At Learn-To-Trade.com, we understand that investors have different needs. That’s why we provide a unique, Lifetime Membership that allows you to re-attend any part of the comprehensive program as often as you’d like.
To learn more about Learn-To-Trade.com’s stock market trading course, contact us at 416-510-5560 or by e-mail at info@learn-to-trade.com.
