Will be there a stock market crash any time soon?
3/6/2017
Will be there a stock market crash any time soon? Let’s shed the light on this question by looking at some fundamentals
US equities skyrocketed to the record levels after the presidential election, as investors anticipated massive tax cuts and stimulus expenditures from Mr. Trump’s administration. But expected rally might collide with reality; and the castle the investors built with such gusto can eventually be destroyed.
The S&P 500 broke the record high ($2,400) on March 1 and the streak of gains might be extended further. The Dow Jones Industrial Average followed the lead and hit its historical high at $21, 169 in March driving volatility metrics to all-time lows.
The market serenity is normally measured by the Chicago Board Options Exchange’s Volatility Index (VIX). Just to remind you – the index shows the S&P 500’s market volatility expectations for the next 30 days. The current levels indicate that there is almost no fear in the market. This foreshadows an imminent stock market crash regardless of the fact that the US economy may experience a boost under Trump ‘s presidency.
An additional factor that the pessimist equity market analysts usually voice in their forecast is the high probability of interest rate increase in March, that hit 80% after numerous FOMC officials confirmed their intentions to raise rates “fairly soon”.
The upsurge the equities experienced in recent years after the financial crisis of 2008 and 2009 can be attributed to the fact that the interest rate worldwide, and especially in the US, were extremely low. As the Federal Reserve and its homologs start changing their loosening monetary policy stances, the investors might rush towards currencies and bonds willing to gain higher yields with minimal risks. The stock market will be whipped by this. So, dear stock bulls, beware of near-term reversals on your technical charts!
There is also another fundamental that warns us not to rush into longs on the US equities. We suggest you looking at Shiller P/E Ratio. It’s a valuation measure applied to broad equity indices, that uses real per-share earnings (ratio of a company’s stock price to the company’s earnings per share) over 10 years. The ratio’s present estimate is close to the one that could be seen in times of the Great Depression; and it is definitely much higher than the average long-term estimate (16.7% - average; 29% – current measure). Last time, the market saw such high prices in times of the dot-com bubble.
Current Shiller PE Ratio: 29.36 +0.01 (0.05%)
Friday, March 3
Market optimists don’t believe traditional indicators, however, saying that the P/E ratio has its pitfalls (Generally Accepted Accounting Principles have changed significantly since the creation of the ratio; EPS can be really twisted; it may result in distortions in the calculations; P/E ratios are lower during times of high inflation because the markets see earnings as artificially distorted upwards). So, they cannot be trusted.
Also, market optimists don’t believe in the occurrence of the stock market crash still having high hoped for Trump’s fiscal policies. They are sure that the markets won’t pay attention to possible policy shocks and market collapses until clear evidence of harm to the US economy surfaces.
The market pessimists partially agree with this point saying that “hopes” will certainly continue driving the index to the new highs until “fear” takes over. They believe that eventually, optimists will have to face the reality and see that the accretive impact from tax reforms won’t be evident until 2018.
So, from the views presented in the article, we can create a balance sheet: you may still target higher levels, as prices may still hit new lows in the short-/near-term. But, for goodness’s sake, be moderate in your bets.
More:
https://new.fxbazooka.com/analytics/12744
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