Will the stock market crash soon? Are there warning signs a crash is pending? If you want to understand what’s going on with the stock market now, there’s three reasons why the stock market will crash soon.
In this post find out:
- Stock market investing 101 (and how it’s common sense a crash is coming)
- How the stock market performed every year for the last ten years (a major hint a crash is coming)
- Warren Buffett’s super brilliant formula shows stocks now are overvalued
- Why the stock market is, “dancing on a knife’s edge,” according to Michael Burry (the person who predicted the housing crisis in 2008)
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Three Reason Why The Stock Market Will Crash
1. Stock Market Investing 101
The first reason why the stock market will crash is common sense. When you have a basic understanding of how the stock market works, you know a crash is coming. The stock market is cyclical. It rises during periods of economic growth and falls during economic downturns. The return is never guaranteed, but historically in the long run the stock market earns 10%. History shows there are periods of massive gains AND massive losses, with an upward trend in the long run.
- 2011: 0%
- 2012 +13%
- 2013: +30%
- 2014: +11%
- 2015: -.73%
- 2016: +10%
- 2017: +19%
- 2018: -6.24%
- 2019: +29%
- 2020: +16%
- 2021: +11% (year to date)
The last ten years the stock market had two years with outrageously high returns: 30% in 2013 and 29% in 2019. The market slightly dipped in 2018 (6%) and in March of 2020, but massively rebounded in a short period of time.
Stock market investing 101 is the market fluctuates. An article by Nasdaq stated market crashes are, “quite common.”
2. The Buffet Indicator
The second reason why the stock market will crash is the Buffett Indicator. Aside from common sense of knowing the stock market is cyclical, there’s a formula! Famous investor, Warren Buffett outlined a simple measure to see if stocks are overvalued and a bubble is pending.
The Buffett Indicator compares the total US stock market to gross domestic product (known as GDP; the total goods or services produced in the American economy). Buffett was quoted in Forbes saying, “If the ratio approaches 200%—as it did in 1999 and a part of 2000—you are playing with fire.” The ratio was 159% during the dot com boom.
As of May 13, 2021 the Buffett Indicator is 223% (an all-time high). Calculated with the total current stock market value of $50.5 trillion; two times more than GDP at $22.6 trillion.
Intuitively stock prices shouldn’t be higher than GDP. If companies are profitable, stock prices increase from people buying products and services companies are selling. High stock prices with low economic output indicates stocks are currently overvalued and a market correction is coming.
1. The rise of investing on margin (borrowing money to invest)
The third reason the stock market crash will crash is debt! I’m not talking about debt from student loans, credit cards, or cars. Right now, there’s $822 billion in margin debt (a record high). Investing on margin is when you invest with mostly borrowed money to purchase an asset (stocks or real estate). You’re betting the stock will earn more than the low interest rate on the loan.
This is speculative investing, just like gambling.
If you need an example how margin debt can go horribly wrong, remember the housing crisis in 2008. Everyone could get a mortgage with no money down because home prices ALWAYS, ALWAYS rise, right? Wrong!
Michael Burry, who was portrayed in the movie, “The Big Short”, predicted the housing crash in 2008. For the same reason (margin investing), he’s forecasting a stock market crash now. The current assumption is stock prices always, always go up, so why not borrow money to invest? The reason is simple: when the stock market declines (as history shows it does fluctuate), and you invested with borrowed money you’re screwed. Burry said the stock market now is, “’dancing on a knife’s edge.’
In summary, the stock market will crash. It’s inevitable.
A stock market crash isn’t something new or unheard of. The stock market is a lot like life: there are good times and bad times.
When you experience good times, you take it for granted and think it’ll last forever. When crisis inevitably hits, the pain feels like it’ll last a lifetime. Then when you least expect it, there’s light at the end of the tunnel.
In other words: the stock market will crash and then the stock market will rebound.
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