Stock Market: Risk Now Highest in Years

Stock Market RiskThis morning, the news is full of talk about Greece. This weekend, the government there introduced capital controls in what’s looking more and more like a country on the brink of financial collapse.

Greece leaving the eurozone is of importance as it opens the door for other struggling countries like Portugal, Spain, and Italy to eventually follow through the same exit. And while I feel for the people of Greece, the “Greece Problem” itself is minor compared to a bigger problem developing here in America.

Dear reader, the total annual gross domestic product (GDP) of Greece is about $240 billion. Comparatively, margin debt on the New York Stock Exchange is now more than double that number—and I think that is the much bigger risk to world economies.

Yes, in April, margin debt on the New York Stock Exchange reached the unprecedented level of $507 billion. This is the highest amount of money investors have ever borrowed to buy stocks on the NYSE! The last time the stock market formed a top—in 2007—margin debt was well below this at only $380 billion. (Source: New York Stock Exchange, last accessed June 22, 2015.)

Investors have borrowed half a trillion dollars, an amount roughly equal to this year’s government budget deficit, to buy stocks. This is very dangerous because by borrowing so much money, investors have over-leveraged themselves. A small pull-back in stock prices could result in margin calls, causing a cascading effect on stock sell orders.

The chart below shows just how optimistic investors have become on stocks (almost as if they have forgotten 2008/2009). This chart shows the total assets in funds that are bearish on stocks.

Total Assets in Funds Bearish on Stocks

Total Assets Rydex Bear Index Chart

Chart Courtesy of

Funds that are bearish towards the stock markets have seen the assets in their funds decline significantly. This shows investors’ sentiment is severely optimistic. With this said, remember: when everyone is on one side of the trade, you have to be very careful.

And the Fundamentals Are Getting Worse

While the technicals look bad for the stock market, the fundamentals are deteriorating quickly, too.

As I have written many times before, for key stock indices to sustain their current highs, two factors are essential: corporate earnings growth and revenue growth. Right now, they are both missing.

For the second quarter of 2015, S&P 500 companies are expected to report a decline of 4.7% in corporate earnings. On March 31, analysts had expected a decline in second quarter earnings of just 2.2%. If 4.7% is actually the percentage by which S&P 500 companies’ earnings contract, it will be the biggest decline in earnings since the third quarter of 2009! (Source: FactSet, June 19, 2015.)

Revenue forecasts are gruesome as well. In the second quarter, revenue of S&P 500 companies is expected to decline by a gruelling 4.4%!

I can’t stress this enough: key stock indices are trading at very risky high levels. I’m concerned the floor supporting stocks could fall at any moment without warning.

Also Read: Stock Market Crash in 2015 is Coming, Despite Widespread Bullishness