The following are four reasons why I believe the stock market will crash in 2016. There are many other reasons why stocks could fall this year, but I see these as the most important, as the odds of a stock market crash in 2016 continue to mount each passing day.
1. Corporate earnings are crashing.
In the fourth quarter of 2015, S&P 500 companies reported a decline of 3.3% in their earnings and 3.9% in their revenue. (Source: FactSet, February 26, 2016.) Corporate earnings have been falling for three consecutive quarters now and revenue has been collapsing for four consecutive quarters. Last time we saw a streak of contracting earnings and revenue like this, it was during the financial crisis of 2008 and 2009.
And there isn’t any light at the end of the tunnel either. For the first quarter, S&P 500 companies are expected to report a year-over-year decline in earnings of eight percent! (Source: FactSet, March 4, 2016.) Stocks do not rise when their earnings are declining.
2. Investors are dumping stocks.
In January of 2016, investors sold $15.5 billion worth of long-term U.S. stock mutual funds. In January of 2015, they actually bought more than $6.6 billion worth of U.S. stock mutual funds. (Source: Investment Company Institute, March 9, 2016.) The stock market rises when money goes into it, not when money leaves it.
3. The Federal Reserve has raised interest rates and has plans to raise them further going forward.
Sure the economy may not be improving for most Americans (and declining corporate earnings are proof the economy is weak), but as the unemployment rate in the U.S. continues to fall below five percent, the Fed will raise rates. Fed Chairwoman Janet Yellen’s bias to lower interest rates to support the stock market is not as clear as Greenspan or Bernanke’s conviction to support assets prices.
4. The global economy remains a troubled spot.
Major world economic hubs continue to struggle. Fifty percent of the S&P 500 companies have operations outside the U.S. and as the global economy struggles, their revenue and corporate earnings will be impacted. For the fourth quarter of 2015, 11 of the 30 Dow Jones Industrial Average companies reported revenue figures from Europe. Nine of these companies reported year-over-year declines, and all of the 11 said it impacted their earnings per share. (Source: FactSet, February 26, 2016.)
Stock Market Outlook for 2016
Dear reader, I remember 2007 very clearly. At that time, those who spoke about an upcoming stock market crash were ridiculed. But in the midst of it, we saw a major top build up. A few months later, stocks fell through the floor.
It’s been very well documented in these pages: I believe 2015 was like 2007.
In both years, we saw major tops put in place on key stock indices. I won’t be surprised to see 2016 be a repeat of 2008, when the stock market started to crash and most investors were taken by surprise.