econintersect.com
       
  

FREE NEWSLETTER: Econintersect sends a nightly newsletter highlighting news events of the day, and providing a summary of new articles posted on the website. Econintersect will not sell or pass your email address to others per our privacy policy. You can cancel this subscription at any time by selecting the unsubscribing link in the footer of each email.



posted on 07 October 2016

Five Reasons To Expect A Stock Market Crash By 2017

by David Zeiler, Associate Editor, Money Morning

Money Morning Article of the Week

Signs of a stock market crash are starting to pile up, increasing the likelihood of a pullback happening before the calendar flips to 2017.

Five signals in particular are flashing a warning to investors to prepare for a stock market crash.

Let's take a look...

Stock Market Crash Indicator No. 1: Markets Are Peaking

Back in August, the three major stock market indicators - the Dow Jones Industrial Average, the Standard & Poor's 500 Index, and the Nasdaq Composite - hit all-time highs on the same day for the first time since 1999.

Since then, the stock market has backed off, but only a little. The Dow is still within 3% of its all-time high, the S&P 500 within 2%, and the Nasdaq within 1%.

The current bull market started in March 2009. That makes it more than seven years old - the second-longest bull market in history. It's ripe for a stock market pullback of 20% or more.

stock market crash

Stock Market Crash Indicator No. 2: Global Growth Is Weak

Last month the Organization for Economic Co-operation and Development (OECD) lowered its 2016 global economic growth forecast to 2.9% from 3%, with prospects for 2017 not looking much better. Slowing global growth exerts drag on the stock markets.

Even a slight uptick in global GDP next year won't change the fact that it will be the sixth consecutive year of below-average economic growth.

Last week the World Trade Organization (WTO) also chimed in. The WTO chopped its forecast for global trade growth in 2016 from 2.8% to 1.7% - the first time in 15 years trade will lag GDP. A slowdown in world trade will further weigh down the global economy.

Stock Market Crash Indicator No. 3: U.S. Growth Is Slowing

Second-quarter U.S. GDP missed its forecast for 2.5% growth by half, coming in at just 1.2%. After peaking at 3.3% in the first quarter of 2015, U.S. economic growth has dropped every quarter.

The U.S. Federal Reserve last month lowered its GDP projection for all of 2016 to 1.8% from its 2% estimate in June.

Meanwhile, the U.S. Labor Department reported that U.S. worker productivity fell at an annual rate of 0.5% in the second quarter. That's the third straight quarter of decline, a bad omen for corporate profits. And lower profits will translate to falling stock prices.

Stock Market Crash Indicator No. 4: Beware of the Fed

Most investors are aware that the Fed's easy money policies have played a major role in the advance of the stock markets over the past eight years. But Ruchir Sharma, the chief global strategist at Morgan Stanley Investment Management, has quantified the impact of years of near-zero interest rates and the bond-buying known as "quantitative easing."

Sharma's research shows that 60% of the stock market's gains have occurred on days when the Fed's Federal Open Market Committee (FOMC) has made policy announcements. It's a relationship Sharma did not find prior to 1980. From 1980 to 2007, the FOMC's effect on stock gains was about half of what it has been over the past eight years.

The problem is the Fed is planning to reverse those market-pumping policies, which will let a lot of air out of the stock price balloon. The FOMC held off on raising interest rates at its most recent meeting but meets two more times this year. Right now the odds of a December rate hike are about 56%.

Stock Market Crash Indicator No. 5: Stocks Are Overvalued

Just about every measure of valuation says the stock market is due for a reset. The price/earnings ratio for the S&P 500, for example, is about 25 now. That's 60% higher than the historic average of 15.62. (Notice how well that jibes with Sharma's number.)

Then there's the Q ratio. Developed by Nobel Laureate James Tobin, the Q ratio is the price of the entire stock market divided by how much it would cost to replace all the companies from scratch. And right now, the Q ratio is saying stocks have reached a point where a stock market crash has invariably followed.

The chart below shows the Q ratio as a percent change from its arithmetic mean with the standard deviations marked as dotted lines.

2016 stock market crash

Historically the danger zone for the Q ratio percent change is when it moves north of 40%. And all but one stock market crash occurred after the number reached the mid-50s. We're at 52% now.

With so many signals for a stock market crash flashing red, here's what investors can do to protect themselves...

How to Prepare for a Stock Market Crash Now

Even with a stock market crash likely, investors shouldn't dump all their stocks and run. There are better, smarter ways to prepare that will preserve profits and even set investors up for the opportunities that a stock market pullback will present.

For the best options, we tapped a couple of Money Morning's stable of experts. Here's what they recommend:

Money Morning Global Credit Strategist Michael E. Lewitt believes in keeping a fair amount of money in "safe havens" like cash and gold. Specifically, Lewitt recommends an allocation of about 10% to 20% to gold and about the same to cash.

While Lewitt likes physical gold, he says investors can use the SPDR Gold Trust (NYSE Arca: GLD) exchange-traded fund (ETF), which trades like a stock. Another option is a gold miner like Goldcorp Inc. (NYSE: GG). In a stock market crash, these investments will rise.

Money Morning Director of Tech & Venture Capital Research Michael A. Robinson says investors anticipating a market pullback should look over their portfolio for winners and take profits. Robinson said:

"If you have a 100% gain on a stock, sell half. That way you get back your entire investment and are 'playing with house money.' This strategy also keeps you in the market should it keep rising for a while."

Robinson also recommends using stop-loss orders. That's simply a standing order to your broker to sell a stock when it falls to a pre-determined price. That limits your losses in the event of a sudden collapse.

Investors should also consider using a trailing stop to protect gains. In that case, the sell order is set for a particular percentage below the current price - Robinson recommends 20% - and "floats" upward if the price is rising. That lets winners ride higher while protecting against reversals.

>>>>> Scroll down to view and make comments <<<<<<

Click here for Historical Investing Post Listing










Make a Comment

Econintersect wants your comments, data and opinion on the articles posted.  As the internet is a "war zone" of trolls, hackers and spammers - Econintersect must balance its defences against ease of commenting.  We have joined with Livefyre to manage our comment streams.

To comment, using Livefyre just click the "Sign In" button at the top-left corner of the comment box below. You can create a commenting account using your favorite social network such as Twitter, Facebook, Google+, LinkedIn or Open ID - or open a Livefyre account using your email address.



You can also comment using Facebook directly using he comment block below.





Econintersect Investing


search_box

Print this page or create a PDF file of this page
Print Friendly and PDF


The growing use of ad blocking software is creating a shortfall in covering our fixed expenses. Please consider a donation to Econintersect to allow continuing output of quality and balanced financial and economic news and analysis.


Take a look at what is going on inside of Econintersect.com
Main Home
Analysis Blog
Joan Robinson’s Critique of Marginal Utility Theory
The Truth About Trade Agreements - and Why We Need Them
News Blog
October 2016 Wholesale Sales Improved
Rail Week Ending 03 December 2016: Finally A Positive Month
November 2016 CBO Monthly Budget Review: Total Receipts Up by 1 Percent in the First Two Months of Fiscal Year 2017
Infographic Of The Day: Copyright - Illegal Download
Early Headlines: Asia Stocks Mixed, Oil Steady, Bank Mafia, Trump To Remain TV Producer, US Life Expectancy Down, India Stocks Suffering, Park Impeached, China Struggles To Support Yuan And More
Heavy Metal And Hard Rock Albums That Went Certified Diamond Status
Down The Drain: Wastewater With The Most Cocaine
Apple's App Store Set For 5 Million Apps By 2020
How Can The UK Government Meet Its Legal Air Pollution Targets?
Most Gun Deaths In The United States Have A Tragic Motive
What We Read Today 08 December 2016
Five Mysterious Space Diseases That Could Kill Astronauts Before They Get To Mars
03 December 2016 Initial Unemployment Claims Rolling Average Insignificantly Worsens
Investing Blog
Are Your Trade Entries Patient Enough?
Investing.com Technical Summary 08 December 2016
Opinion Blog
Looking At Everything: Trump's $1 Trillion Infrastructure Plan
The Global Financial Mess Is Due To Political Failure
Precious Metals Blog
Silver Prices Rebounded Today: Where They Are Headed
Live Markets
09Dec2016 Pre-Market Commentary: Wall Street Set To Open Flat, But On The Green Side, WTI Crude Attacking Resistance, Investors Ready For A Breather
Amazon Books & More






.... and keep up with economic news using our dynamic economic newspapers with the largest international coverage on the internet
Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government



Crowdfunding ....






























 navigate econintersect.com

Blogs

Analysis Blog
News Blog
Investing Blog
Opinion Blog
Precious Metals Blog
Markets Blog
Video of the Day
Weather

Newspapers

Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government
     

RSS Feeds / Social Media

Combined Econintersect Feed
Google+
Facebook
Twitter
Digg

Free Newsletter

Marketplace - Books & More

Economic Forecast

Content Contribution

Contact

About

  Top Economics Site

Investing.com Contributor TalkMarkets Contributor Finance Blogs Free PageRank Checker Active Search Results Google+

This Web Page by Steven Hansen ---- Copyright 2010 - 2016 Econintersect LLC - all rights reserved