“A prediction about the direction of the stock market tells you nothing about where stocks are headed, but a whole lot about the person doing the predicting” — Warren Buffett
These days, you hear the word, “crash” all the time.
Now, I’m not talking about runaway trains, highway accidents, or a jet airliner disaster. I am referring to a more devastating kind of catastrophe, one that could cripple the lives — and the life savings — of millions of Americans, without mercy and with little warning: stock market crashes.
The idea here is to contrast the dire warnings you hear from Wall Street against what we already understand about the economy and the stock market. My point is simple: I don’t think you need to pay $10,000 for a single phone call with a bank analyst, so he or she can tell you the market is likely to decline soon and you should sell your holdings.
The reason you don’t need that kind of advice is because you and I know financial markets go up and down all the time — that’s the very nature of the markets.
So why do some people keep making those doomsday predictions? Is there anything to it? Is it time to start lightening up on our holdings or hold on tight chasing the bull market higher?
Who Let the Bulls Out? Negative News Galore from Wall Street
Some of the biggest names in finance have recently forecasted economic doom and a big stock market wipeout. But, in many cases, they made the very same prediction last year, the year before that, and the year before that.
You see, many people don’t realize a lot of these so-called headlines are really just advertisements, designed to attract new subscribers to purchase newsletters or some other kind of financial advice — but they may be doing the public a remarkable disservice.
Like ‘The Boy who cried Wolf’ from the Aesop’s Fable, they may in fact be unintentionally conditioning the public to disregard all warnings of a market correction.
By repeatedly calling for a crash that so far has yet to materialize, they leave the guy on the street thinking these ‘so-called experts’ are no smarter than anyone else.
When the crash comes — and it will someday because that’s what stock markets do — these experts will then remind potential subscribers of their latest accomplishment. They’re savvy businessmen who understand it’s just a matter of time before they can start taking credit, while increasing their fame and notoriety, for having called the “big crash” in advance.
Different Names, Same Prediction
The recent resurgence in bullish sentiment hasn’t helped abate the gloomy sequence of bearish forecasts coming from Wall Street. Nearly every prominent financier keeps telling us the end is near…
But is it really?
Well, maybe yes, and maybe no.
Most are aware some economists and distinguished investors are warning of a stock market crash, and they have been making these predictions for quite some time now.
Jim Rogers, who co-founded the Quantum Fund with George Soros, recently went as far as to say, “A $68 trillion ‘Biblical’ collapse is poised to wipe out millions of Americans.”
Billionaire investor Paul Tudor Jones described stock market valuations as “terrifying” back in April at a closed-door asset management conference hosted by Goldman Sachs.
Noted economist Mark Faber, a.k.a. Dr. Doom, recently explained to a CNBC commentator that “investors are on the Titanic” and that he thinks the market is about to “endure a gut-wrenching drop that would rival the greatest crashes in stock market history.”
Last year, in January of 2016, the Royal Bank of Scotland — in a memo to its clients — said, “Sell everything, except high-quality bonds. This is about return of capital, not return on capital. In a crowded hall, exit doors are small.”
Dismal Forecast, But Profits Aplenty
While bankers are accustoming us to depressing, conclusive research of “sell, sell, sell,” they are basking in pure profitability.
Even as the stock market has kept on pushing its upward trend, no forecaster has yet to recognize the overall prediction is a setback, if not quite a mistake, and Wall Street has been happily absorbing a great portion of the income generated by high fees and trading commissions.
Recently, the investment brokerage firm of Charles Schwab, announced that the number of new brokerage accounts soared 44% during the first quarter of 2017. More specifically, Schwab stated that individual investors are opening new stock trading accounts at the fastest pace the company has seen in 17 years.
Some say this is a classic sign of a market top, when individual investors are once again feverously buying expensive stocks at price levels never seen before in the history of the markets.
And while nearly every metric suggests company valuations are already sky-high, for some reason individual retail investors still believe stock prices will continue to rise.
According to the Yale University Stock Market Confidence Index, for example, over 90% of individual investors believe that the stock market will rise in the next 12 months. Of course, this sentiment is not based on any real data; it’s simply an emotional barometer, a determination based simply on what people think and feel.
Should Retirees Head to the Exits?
The answer is not quite simple, but there are some clues.
Corporate profits are more or less tethered to the overall economy. If GDP growth is flat, corporate profits will be flat, and real GDP growth in the US went flat in 2016, at just 1.6%.
In addition, The Federal Reserve Bank of Atlanta estimates that the US economy grew at a pitiful 0.5% annualized rate in the first quarter of 2017.
In other words, growth has been stubbornly weak for years now, pointing to fact that Obama is the only U.S. chief executive in history not to have had one single year of 3 percent GDP growth during his presidency.
Consumer spending, the mainstay of the US economy, slumped in the first three months of this year. Moreover, interest rates are starting to rise, which increases borrowing costs for both businesses and individuals. Reports of consumer debt again reaching levels not seen since 2007 have had little impact on the markets.
It is an interesting phenomenon, but when stock market prices are soaring, investors don’t really want to pay attention to the facts.
Now, I’m not suggesting a major crash is imminent — it’s entirely possible that the stock market will continue to climb higher, with some gurus expecting prices to rise by another 10 or 20%, or more.
Yet it is also possible we will see an epic drop from these levels. We should remember, the NASDAQ Composite fell 78% from its peak in 2000.
Rational individuals will always consider their downside first because for them, the fear of loss is a far more powerful instinct than the fear of missing out.
It’s important to keep in mind markets really are displaying all the elements of a classic bubble top: a surge in activity from retail investors, general market euphoria, record-high prices, and what appears to be unsustainable valuations.
However, we don’t know if there are weeks, months, or even years left before this stock market bull turns to bust. We know it will happen someday because that’s what stock markets do — we simply can’t say when.
Takeaway
What should you do in this environment of uncertainty?
Quite simple: If the potential reward isn’t worth the amount of risk, don’t do it. Find something else. Or do nothing and simply wait patiently on the sidelines. We must remember we can never risk more than we can comfortably lose.
Maybe we should all be listening a little closer to what market experts have to say — or completely disregard the “the Wall Street spin.”
Either way, we will find out soon enough what the stock market has in mind for us.
