Stock Market Crash in 2016? Of Course It Will; Here’s Why

Stock Market CrashDear reader, after 30 years of studying the stock market, I’ve rarely seen stocks at such high valuations in relation to the economic environment that prevails. As you will read below, corporate earnings have been collapsing for four (soon to be five) consecutive quarters and insiders are falling over themselves to get out of stocks! Historically, the stock market always succumbs to this pressure.

So why hasn’t the stock market collapsed yet? Two reasons for that: artificially low interest rates and corporate stock buybacks. Interest rates have been kept so low for so long that investors have been forced into stocks to make money. And because of near-zero interest rates, companies have been able to borrow money to buy back their stocks, thus artificially pushing up their per-share earnings.

But the proverbial sh*t is really starting to hit the fan. Look at this…

As of April 29, two-thirds of the S&P 500 companies have reported their financial results for the first quarter of 2016. These companies are collectively reporting a decline of 7.6% in their earnings! (Source: “Earnings Insight,” FactSet, April 29, 2016.)

Here’s the kicker: S&P 500 companies have been reporting a decline in earnings since the second quarter of 2015. The decline in earnings in the first quarter of 2016 will mark the fourth consecutive decline—or the longest streak of contracting earnings—since the financial crisis of 2008 and 2009!

And the future doesn’t look any better.

The average estimate is for second-quarter earnings of S&P 500 companies to drop another 4.4%!

If investors think a stock market crash won’t happen in 2016, they are just fooling themselves.

Corporate insiders know the score with the overpriced stock market. They are selling their stocks at an alarming pace. In April, for every 22 shares corporate insiders purchased, they sold 875 shares! (Source: “Insider Activity and Concentration by Industry,” CNBC, last accessed May 5, 2016.)

Where’s the Stock Market Headed in 2016?

I know it’s difficult to conceive a stock market crash when key stock indices are near their all-time highs. Dear reader, you have to look beyond the noise and irrationality.

In the summer of 2007 key stock indices were near their all-time highs too…in the face of deteriorating economic conditions. Those who talked about a stock market crash were ridiculed. Eventually, fundamentals came into play and a stock market crash followed a few months later. Euphoria can take stocks higher than investors expect, but the higher that euphoria takes them, the harder they eventually fall.

As I have written extensively, in 2015, the stock market spent the year building a major top, just like it did eight years earlier in 2007. This year could be the year when the stock market starts to crash, just like it did in 2008. Big losses could be ahead for stock market investors.