New York, NY, May 25, 2016 – Profit Confidential (www.ProfitConfidential.com) an e-letter of Lombardi Publishing Corporation, a 30-year-old consumer publisher that has served over one million customers in 141 countries, is reporting that two leading economic indicators point to a stock market crash in 2016.
“It’s rare to see stocks with such high valuations when compared to the prevailing economic environment,” says economist and lead contributor Michael Lombardi. “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.”
Lombardi explains that despite the high valuations, there are two reasons why the stock market has not yet collapsed: 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. However, this can only mask the negative fundamentals of an overvalued stock market for so long.
As of May 13, 91% of S&P 500 companies have reported financial results for the first quarter of 2016. Collectively, these companies have reported a -7.1% decline in earnings. This is part of a broader trend, as 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, with the estimated earnings decline for the second quarter being -4.6%. (Source: “Earnings Insight,” FactSet web site, May 13, 2016; http://www.factset.com/websitefiles/PDFs/earningsinsight/earningsinsight_5.13.16.)
“Second, corporate insiders know the stock market is overvalued and ripe for a crash. They’re selling their stocks and heading for the exit at an alarming rate. In April, for every 22 shares corporate insiders purchased, they sold 875 shares,” Lombardi concludes. “It’s difficult to conceive of a stock market crash when key stock indices are near their all-time highs, but investors need to look beyond the noise and irrationality. In 2015, the stock market spent the year building a major top, just like it did 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.” (Source: “Insider Activity and Concentration by Industry,” CNBC web site, May 18, 2016; http://www.cnbc.com/id/15839243.)
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Founded in 1986, Lombardi Publishing Corporation, which has served over one million customers in 141 countries, is one of the largest consumer information publishers in the world. For more information on Lombardi Publishing Corporation, visit www.LombardiPublishing.com.