Analysts Ignore Stock Market Crash Warning Signs
The U.S. stock market is off to a terrible start in 2016 after a forgettable 2015. That won’t be a surprise to anyone who has been a regular here at Profit Confidential. There are several red flags warning the U.S. is on the verge of a stock market crash in 2016. And we’ve been picking up the not-so-subtle hints.
Apparently, few other financial analysts have, because they all seem like they’ve been caught off guard. The fact of the matter is that the economic data is grim and has been grim for quite some time; it points to a stock market crash in 2016. Fortunately, there is something investors can do to protect their wealth—and even add to it.
U.S. Stocks Getting Hammered
U.S. stocks last bottomed in March 2009. Since then, it’s been a heyday for Wall Street. Artificially low interest rates in the face of weak economic data have propelled the S&P 500 and Dow Jones Industrial Average to dizzying heights.
But the long-in-the-tooth bull market is finally showing signs of aging. Not because the data is getting any worse, but because investors are finally beginning to look at the underlying data. And they can only support an artificially high stock market for so long.
First things first, after climbing more than 200%, the S&P 500 gave investors a peek at the shape of things to come in 2015. After three years of double-digit gains, the S&P 500 rounded out 2015 down 0.7%. That’s the worst annual performance since the 2008 financial crisis.
And that downward pressure has extended into 2016. After seven days of trading, the S&P 500 has lost almost six percent of its value. More broadly, the S&P 500 is down 10% from May’s high of 2,134.
The Dow Jones is down more than six percent since the beginning of the year; that represents the worst start of the year ever for the Dow Jones. Since hitting a high of 18,351 in May, the Dow is down 10.6%.
S&P 500 Finally Acting Its Age
Why are stocks down? After all, December jobs data was solid and the Federal Reserve has said a stronger economy will lead to several more rate hikes in 2016. Well, the stock market is only as strong as the stocks in the index and those stocks are not doing well.
Stocks have been losing steam for years now, but no one seemed to notice or care. Now it’s payback. I enter as evidence, 2013, an exceptional year for the stock market, with the S&P 500 up almost 30%. However, the increase came from income-starved investors looking to beef up their portfolios. They rewarded stocks for performing poorly.
In each successive quarter of 2013, a larger percentage of companies revised their earnings guidance lower. During the first quarter of 2013, 78% of S&P 500 companies that provided preannouncements issued negative earnings guidance, 81% did in the second quarter, a record 83% did in the third quarter, and another record 88% did so in the fourth quarter.
Fast-forward to 2015 and the bull market experienced some resistance. In the fourth quarter, the estimated earnings decline is forecast at -5.3%. Oh, how times change. At the end of the third quarter, the forecasted earnings decline for 4Q15 was just -0.6%. If the index reports a decline in fourth-quarter earnings, it will be the first time the index has seen three consecutive quarters of year-over-year declines since the first quarter of 2009 to the third quarter of 2009. (Source: “Earnings Insight,” FactSet.com, January 8, 2016.)
The estimated revenue decline for the fourth quarter of 2015 is -3.3%. If this is the final revenue decline for the quarter, it will be the first time the index has seen four consecutive quarters of year-over-year revenue declines since the fourth quarter of 2008 through the third quarter of 2009.
And the outlook is no better as we begin 2016.
2016 Could Be Cataclysmic for Global Stocks
The year 2016 could be a cataclysmic year for the global market, as anemic economic growth, tensions in the Middle East, and gutted commodity prices weigh on stock prices. Is it too far-fetched to say major stock indices could lose 20% of their value in 2016? And that oil prices could fall below $20.00? Nope. Each is a very real possibility.
Because of low oil prices, stock indexes in Canada and the U.K., because of their high weighting in commodities and energy, could fall 20%. U.S. and European markets could fall between 10% and 20%. China, the epicenter of economic stress, is already in free-fall and it’s going to snowball.
The exploding kegs of economic dynamite sounding around the world have not been missed by the astute minds at the World Bank. It cut its global growth forecast…again, citing a widespread, ongoing economic slowdown across the world’s major economies.
The World Bank now projects global gross domestic product growth will be a princely 2.9% in 2016, down from June’s forecast of 3.4%. The main reason for the downward revision is negative trends in the emerging economies that make up the BRICS: Brazil, Russia, India, China, and South Africa. (Source: “Anemic recovery in emerging markets to weigh heavily on global growth in 2016,” The World Bank, January 6, 2016.)
Apparently, these countries could derail the so-called economic momentum in the U.S. The World Bank sees U.S. gross domestic product (GDP) growth of 2.5% in 2016, European GDP growth of 1.7%, and 1.3% GDP growth in Japan. Though, to be fair, the World Bank did warn that Japan’s recovery “remains fragile and dominated by downside risk.”
The World Bank isn’t going out on a limb with that one. You could insert any country’s name in that sentence if you like and it would fit perfect.
Chin up bulls; the World Bank currently predicts GDP growth in 2017 and 2018 to be 3.1%. But then again, when hasn’t the World Bank revised its projections, of late, much lower?
Overvalued Stocks Poised to Crash in 2016
If, over the next few months, anemic economic growth drags on and poor data continues to stream out of China, the world’s second-biggest economy, the market sell-off could easily—and quickly—turn into the next global crisis and stock market crash.
It wouldn’t take a lot for investors to see the light of day and run for the exits, not with the stock market this overvalued. And by that, I mean the S&P 500.
The CAPE PE ratio for the S&P 500 is based on average inflation-adjusted earnings from the previous 10 years. Its ratio has a value of 24.4; this means that for every $1.00 of earnings a company makes, investors are happy to pay $24.40. Even after the broad-based sell-off, the only time the ratio has really been above these valuations was in 1929 and 1999. (Source: Yale University Economics web site, last accessed January 12, 2016.)
If we compare the current valuation of the S&P 500 to its historical average of 16.59, the stock market is overvalued by roughly 67.9%.
In the U.S., the broader markets have been supported for years and years by artificially low interest rates and ever-optimistic investors who have pinned their hopes on a well-entrenched, sustainable economic recovery. If the U.S. was an economic island, this might have happened. But it isn’t and it hasn’t.
Thriving During The Great Crash of 2016
While the Federal Reserve has pulled back on its money printing, the damage has been done. By keeping the money “flood gates” open for so long, the Fed has inadvertently created a stock market bubble.
Companies are seeing their profits and sales contract—a clear indication the American economy is in trouble, as consumers are drastically pulling back on their spending.
With the global economy fragile, the Federal Reserve raising rates, and the Bank of England expected to do the same, the stock markets are going to have to stand on their own economic legs. But the global economy is a crutch right now and the markets are going to fall—hard.
You can’t time the stock market, but you can certainly look at the economic indicators that impact revenues and earnings. And there is enough evidence to point to a huge stock market crash.
If you want to learn more and how to protect your cash, I invite you to watch an advertising presentation recently put together called “The Great Crash of 2016.” In the presentation, you’ll learn about the six indicators our research and analysis has uncovered that point to a stock market collapse and what you can do to protect yourself.
The good news is that you could protect yourself from the stock market collapse headed our way. The better news is that if you position your portfolio properly, starting today, you could actually make money during the next devastating down leg of the market, while others struggle like never before.
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