A few bears are coming out of the woods to warn investors about a potential market crash
It has been a tremendously profitable season for financial markets, as the S&P 500 has closed at record figures 49 times this year. Many are flashing their investment portfolios and investment ‘gurus’ can’t seem to get enough media coverage to keep saying: “the best days are still ahead”.
It seems that the 2007 nightmare is a thing of the past, but a few voices are starting to ‘get loud’ on warning investors about a few dark clouds on the horizon.
Even though many well-known voices of the financial world are pretty sure that markets are not actually overvalued due to the fact that corporate earnings have grown steadily and economic fundamentals are pretty solid, others are worried about a significant overvaluation, fueled by excessive funds that were poured in during the latest sub-prime crisis.
The most conservative side of those predicting a market downturn is saying that this rally is not a sustainable one unless a tax reform gets approved. This is the case of David Kostin from Goldman Sachs, who recently said that “a substantial increase in profitability in 2018 will likely require policy tailwinds”, referring to a potential corporate tax cut.
On the other hand, there are those who are more radical in their approach, and are simply saying that a crash is coming. John Hussman, the President of Hussman Investment Trust, has said in this regard that this is “the most broadly overvalued moment in market history”. He also added that stock valuations are as high as in 2007 and nearly as high as in the 2000 dot-com crisis.
This statement shouldn’t be taken lightly, since one of the most common signs of a market bubble is a herd mentality where everybody says ‘this is never going to end’. History has taught us quite the opposite though.
It is important to keep in mind that the Fed has stated its intention to take out of the market at least $4 trillion in liquidity that were injected as part of its “Quantitative Easing” in an effort to put credit markets to work during the sub-prime crisis of 2007. Taking out this massive amount of money from the markets will definitely have a negative effect on valuations.
Therefore, even though a severe crash might not take place, this variable is surely one to watch for during the following months.
There is also a lot of discussion around a potential interest rate hike coming from the Fed that might tag along to play a big part in this story, and you should act before it is too late to take advantage of this low-interest rate environment.
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