Don't Get Caught in a Stock Market Crash

The bottom line is that when the bottom falls out, stocks will fall around 40% and will not rebound. We are running on fumes with mass hysterical confidence and inflows from retirement savings accounts. The effects of the crash on consumer and business confidence might well be catastrophic, fueling a drop in economic activity that will drag down earnings and the price of stocks traded on the open market.

see https://www.nytimes.com/2017/09/15/business/stock-market-mass-psychology.html?_r=0

You can read the article or not. I will summarize. I admit that I was considerably off on the timing of the crash. This article is by one of the most respected economists, worldwide.  He accurately predicted prior crashes in the stock market and real estate market in 2008. His observation is that the reason for overpricing stocks is the psychology of investors who believe that others will continue buying stocks.

I think he and I both missed something.The missing component is the inflow of cash savings generated by 401k’s and other retirement programs. Nobody knows where else to put the money so they invest in stocks. This factor alone creates an excess demand that is blind to value. And it might soften the effects of a stock market crash but it won’t eliminate it

All the red flags are out. The baseline of all stock valuation is a ratio between the earnings of a company to the price of its stock. Normal for a stable market is 16. The current ratio is 30. No reasonable foundation exists to support a stock market that is based upon a price-earnings ratio of 30. This number came up in 1929 and 2000-2003.

In 1929 stocks lost 80% of their value. In the 2000’s stocks lost 50% of their value. I think the probable downside is less than 40% but when it happens it will be sudden — just like prior crashes. In both cases, confidence was high — until it wasn’t.

We are tap dancing on thin ice. The question is when, not if. I strongly recommend that you move your money into cash or short-term debt instruments (bonds) issued by either the Federal government or a Triple A rated company. You might “miss out” on further growth but you will preserve your capital and ride out the storm. While there will be a rebound after the crash, it will not return to current levels because current levels are unsustainable.

Posted in Uncategorized |