A little more than a week ago, after the Brexit news, we saw key stock indices like the S&P 500 plummet very quickly. It looked as if the decline would continue; however, now, it looks like nothing happened.
Looking at this, investors are asking, what’s next?
If you ask the opinion of Michael Lombardi, founder of investment research firm Lombardi Publishing and the popular financial web site Profit Confidential, the S&P 500 could see severe losses in 2016 and early 2017. And according to Michael, the Brexit is just one of the many factors that suggests the S&P 500 could crash like it did in 2008 and 2009.
I had a chance to chat with Michael Lombardi about where the S&P 500 is headed next. The following is a transcript of our conversation. It has been lightly edited for clarity.
Moe Zulfiqar: On Profit Confidential, you have been telling your readers that the S&P 500 could see massive declines. Tell me three big reasons you believe this could happen.
Michael Lombardi: For starters, earnings are outright collapsing. Corporate earnings of S&P 500 companies have declined between from the second quarter of 2015 to the first quarter of 2016. In the second quarter of 2016, they are expected to decline as well! Understand this: if earnings fall, stock prices will tumble. Look back at any previous stock market crash and you will see this phenomenon prevail.
Next, you have to pay close attention to the global economy. Right now, we’re seeing major economic hubs slowing down. Pick a map, point to a major country, and it’s very likely that country is struggling to grow.
And if you think the U.S. economy and U.S. companies don’t have any exposure to the global economy, you may be truly misled. As the global economy slows, American companies’ earnings will tumble and the stock market will decline.
Last but not the least, the Brexit is something people are not taking very seriously. It is going to have many implications and there will be a lot of uncertainty. Remember: when there’s uncertainty, investors sell stocks.
I want to be very clear here—there are many more reasons why key stock indices like the S&P 500 could fall significantly. These are just three major reasons.
Moe Zulfiqar: How much do you think the S&P 500 could drop?
Michael Lombardi: As my readers know very well, I hate giving exact targets. To give a slight idea, I will not be shocked if the S&P 500 sees a 20%–30% move to the downside in the near term.
And if the losses persist, it could really spook investors, sending them running for the exits. Investors are too complacent right now. This will make the sell-off much bigger.
Mind you, I will not be shocked if these losses happen very quickly.
Moe Zulfiqar: What could investors do in case there’s a sell-off?
Michael Lombardi: Currently, the risks of downside are far greater than the chances of the stock market moving higher. In times like these, investors should be focusing on preserving capital more than anything else—take some profits off the table and cut losses. The last thing you want to do is give away your gains by keeping a losing position.