by Dan Burrows | March 7, 2014 9:12 am
The stock market is going to crash, of that you can be sure.
The market will roll over on panic-fueled selling and it will feel as if there’s no bottom in sight. This is what stocks do. Bear markets follow bull markets like night follows day. From the panic of 1901 to the recent credit crisis, the U.S. stock market has crashed and gone into a prolonged funk on nine occasions. It will happen again.
Just not necessarily anytime soon.
But it feels like it will. After all, the longer a rally lasts, the more anxious investors get. With the S&P 500 up 177% since bottoming out five years ago, that anxiety is beginning to boil over.
However, feelings of impending doom are hardly a method for timing the market. As sure as you can be that stocks will tumble eventually, you can be just as sure that there’s no foolproof way for predicting when.
If anything, the current rally still has a long way to go. Indeed, there have been 13 major rallies in the last 113 years, lasting an average of about 1,900 days. The current rally is still only about 1,300 days old.
Of course, that hasn’t kept jittery investors from reading the tea leaves, shuddering at every piece of bearish data or bad omen they can find. From a slowdown in China to the Federal Reserve removing stimulus, there are a number of popular themes out there that bears use to predict an imminent market crash. And yet both individually and collectively, none of them are very convincing.
Here’s are the top five reasons bears are saying the market will crash — and why you needn’t worry about any of them:
Click to Enlarge There’s a very scary chart making the rounds that has us on the precipice of another Great Depression. By overlaying the current rally with market action from 1928 and 1929, this chart does indeed make it look like we’re days away from another epic crash.
Have a look: it’s uncanny. (Chart credit: McClellan Financial Publications)
In the crash preceding the Great Depression, the Dow Jones Industrial Average fell 40% in a month! Are we sleepwalking into the same disaster? Nope. Happily, this chart says nothing like that at all.
For one thing, the economic environment of today is vastly different from what it was in 1929. More importantly, the axes and time frames on the chart aren’t lined up. Once you redraw the chart that way — as Quartz has done — the similarities completely disappear.
It’s just a couple of lines.
Legendary investor George Soros has a net worth of $23 billion. He famously made $1 billion on a trade in which he shorted the British pound. So when it was recently disclosed that Soros’ hedge fund ramped up a huge bet on a market decline, of course it garnered all sorts of nervous attention.
True, Soros raised his bearish against the S&P 500 to $1.3 billion from $470 million, accounting for more than 11% of the portfolio. But it’s not as simple as all that.
The billionaire doesn’t operate Soros Fund Management on a daily basis anymore. Furthermore, the majority of the fund is in long positions on major stocks — FedEx (FDX), Halliburton (HAL) and others — that would get creamed in a market meltdown. That makes Soros’ put on the S&P 500 look a lot more like a hedge than a prediction of a crash.
The Federal Reserve has been trying to juice economic activity with quantitative easing for so long, it’s hard to image how the market could live without it. But now the Fed is gradually unwinding its program of buying up long-term debt and — sure enough — benchmark interest rates are rising.
The fear is that rising rates will reduce already weak demand, rip into corporate profit margins through higher borrowing costs and clobber emerging markets. It’s going to take some getting used to, but Fed tapering is unlikely to cause a market crash.
The central bank prepared the market for this eventuality, so investors were able to reset expectations. Furthermore, the Fed wouldn’t ease off the stimulus if the economy weren’t ready.
There will be volatility, but a crash? The Fed has lopped $20 billion off the program so far … and stocks are at all-time highs.
Something bears point to that’s signaling a market collapse is a decline in trading volume, both on the major exchanges and within the nation’s big brokerages.
There are a few problems with this, especially the fact that it’s been wrong throughout the rally. Commissions and market volume have been weak for years now, and that hasn’t correlated with market performance at all.
Besides, it’s not really true. Yes, for much of the rally, individual investors sat on the sidelines or put their money to work in bonds. But now they’re coming back to stocks. In February alone, more than $8 billion went into domestic stock mutual funds, according to the Investment Company Institute, vs. only about $2 billion to taxable bond funds.
China has been a main driver of the global economy for the better part of a decade. Insatiable appetite for everything from copper wire to wheat drove up prices and profitability for a wide range of industries, especially those tied to commodities.
But now China is purposely trying to cool off, moving away from investment to consumption. The country is targeting GDP growth of 7.5% this year, far below mid-decade rates of 12% and higher.
However, it’s hardly a slam-dunk that even a hard landing would cause a crash. Commodity prices have been on a downtrend for years and the market is at record highs. Much of the market doesn’t depend on demand from China, and a recovering Europe is taking up some of the slack.
A slower China is a serious headwind for stocks, but not an automatic disaster.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
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