A stock market crash occurs when the underlying fundamentals of the economy and corporate earnings are tormented at the same time. Unfortunately, that is what is happening right now.
Starting with corporate earnings, in the first quarter of 2016, S&P 500 companies are expected to report a decline in earnings of 8.5%. (Source: FactSet, April 1, 2016). We’ve just completed the fourth consecutive quarter of declining corporate earnings—the longest streak of declining quarterly earnings since 2009.
What’s scary: Corporate earnings are expected to decline by another 2.5% in the current quarter! Stock markets do not rise when the companies that trade in the market are seeing their profits decline. From my viewpoint, take out the unprecedented and record corporate buybacks that are taking place and the whole stock market collapses.
And the U.S. economy itself is anything but good.
Even the Federal Reserve is pulling back on its economic growth forecasts. In its most recent economic projections, the Fed predicted the U.S. economy will grow by 2.2% in 2016. This was down from 2.4% in the Fed’s December 2015 projections (source: Federal Reserve, March 16, 2016) and down from the Fed’s December 2013 projection the U.S. economy would grow 3.2% in 2016 (source: Federal Reserve, December 18, 2013).
If the past is any indication of the future, we will see these economic growth projections get revised even lower.
The U.S. economy is struggling. Just look at these facts, all of which I have covered in past issues of Profit Confidential: Government debt is at a record high. Food stamp usage is at a record high. Student loans are at a record high. Subprime auto loans are at a record high. Health care costs are at a record high. Labor force participation is at a record low. Median family income is still down from 2007. Home ownership is at a multi-decade low. And we have more people on government handouts than there are working.
Stock Market Outlook for 2016
With all this said, if someone still says the stock market will go higher, I would say run!
Stock markets tend to be irrational for long periods of time. One of the greatest examples of this phenomenon was the year 2007. Many economic and corporate gauges we follow started turning negative that year, but the stock market crash didn’t start happening until well into 2008.
But the facts speak for themselves. The Dow Jones Industrial Average reached a peak of 18,351.36 in May of 2015. Today, almost one year later, the Dow Jones is down five percent from that peak and continues to show weakness. Investors, from what I can see, are selling into rallies, not buying into them.
As I have gone on the record before as saying, in 2015, I believe the stock market spent the year putting in a major top. 2016 could be the year when we see the broad market sell-off worsen. Be diligent and be cautious. You don’t want to get stuck in a stock market crash.