Is the Stock Market About to Wipe Out (Again)?
Is the Stock Market About to Wipe Out (Again)?
Despite weak economic indicators, stocks have continued to appreciate in the current bull market for the past seven years, which leads many analysts to conclude that stocks are now overvalued and likely to crash according to a 247wallst.com report. The analysis points out these persuasive arguments:
- The S&P 500 is currently valued at 17.8 times forward earnings.
- Low interest rates in the United States and negative rates in Japan and Europe worry financial analysts.
- GDP growth is not expected to reach projected yields in the United States and other countries.
- Dow Jones stocks are outperforming 30-year U.S. Treasury Bonds in 21 out of 30 cases.
- The Dow Jones industrial Average, or DJIA, despite recent losses, is only 300 points away from its record high.
- Higher payrolls and greater unemployment are also possible indicators of an economic collapse.
- Years of weak corporate earnings also reinforce the concept that stocks are currently overvalued.
- Warnings of a financial crisis have been issued by the International Monetary Fund.
- Increased global debt has been spearheaded by China, Japan, Brazil, Chile and Turkey.
- Britain’s decision to leave the European Union raises many uncertainties.
- Business indebtedness of nonfinancial firms has risen from $4.0 trillion to $18.0 trillion in just 10 years between 2004 and 2014 according to Profitconfidential.com.
The U.S. Economy Seems Strong, but Experts Fear Recent Gains Are Misleading
Since bottoming out in 2009, NASDAQ has increased by 250 percent.and the NYSE is up by 130 percent. However, many experts fear these gains are misleading and represent gains from digital investors worldwide who are starved for income, worried about the economy and investing in anything in record numbers, which is temporarily driving prices to unsustainable levels. Companies are dealing with low profits by cutting costs, streamlining operations and selling off unprofitable assets, but there are limits to what cost-cutting can accomplish if sales don’t improve. In this scenario, it won’t take much bad news to influence investors to sell their stocks at any price to get out before the market totally collapses.
Warren Buffett purportedly uses the Market Cap to GDP ratio to value stocks. If the ration is 100 percent, that indicates that stocks are priced fairly. The higher the Market Cap ratio rises over 100 percent, the more overvalued stocks are. The current Market Cap is at 123.6 percent, which is the highest it’s ever been–except once–since 1950. That occurred in 1999 when the Cap reached an astonishing 153.6 percent. Another common method used to value stocks is the Wilshire 5000 to GDP. According to this valuation method, the current figure is 124.2 percent. It’s only been this high once since 1970 when it reached 136.5 percent in 2000.
Dueling Scenarios from Carl Icahn and Warren Buffet
Leading investment gurus Carl Icahn and Warren Buffet offer different interpretations of what the market is likely to do later in 2016 and in 2017. According to a report posted on Fortune.com, Icahn released a doom-and-gloom video in September of 2015 that warned of the imminent financial risks due to overvaluation, artificially low oil prices and trouble with China’s bond markets. Many of Icahn’s predictions have become reality as oil prices are beginning to rise. The Federal Reserve is also scrambling to keep interest rates low while considering stimulus money to pump up the economy. Icahn now warns of even greater risks due to weak GDP growth globally and high price-to-earnings ratios throughout the market.
Warren Buffett, however, disputes that these conditions mean that stocks are headed for a crash. Apparently, despite Brexit and uncertainties about the U.S. presidential election, global investors are continuing to drive record stock gains. Buffet supports Donald Trump in the election because he views Trump as a “brilliant businessman.” However, plenty of political opponents disagree with this assessment including fellow Republican billionaire Michael Bloomberg who characterizes Trump as a “con artist” according to Inc.com.
Putting Things in Perspective
One undeniable truth remains about investing in stocks: There are always risks no matter how well the risk is mitigated or how thoroughly the underlying influences are investigated. That said, diversifying stock investments with real estate, commodities and precious metals is a sound financial practice regardless of how quickly stocks seem to be rising or who is elected president on November 8th. Find out more about stocks and market forces at the PersonalMoneyStore.com.