Evil October has shaken the stock market and sparked fear amongst investors, after all, this is the month in which some memorable bad developments have happened: the Panic of 1907 (a little-mentioned banking meltdown, alarmingly similar to 2007), the infamous Black Tuesday, Black Thursday and Black Monday of 1929, and the Black Monday of 1987. Even though October is almost over and only a few stocks have experienced a significant downturn, market insiders say the entire market is ‘tipping on a knife’s edge’ and a crash of epic proportions is fast approaching.
The Federal Reserve is extremely worried about the rapid pace of inflation growth. And borrowing costs are following the same upward trend, which will start hitting consumers’ wallets before the end of the year. But everything can fall apart even before we have to take our winter coats off the closet. The Fed is about to hike interest rates over the next few weeks, and that will remarkably increase the chance of setting off a massive stock market crash. Over the past year, the U.S. stock market recorded an unprecedented boom, mostly thanks to low-interest rates. The Fed’s policies artificially propped up the market by suppressing interest rates to near-zero levels, and in that way, making borrowing conditions more appealing for traders to take more money to invest and push up company valuations to sky-highs. Higher interest rates could also trigger widespread stress in the economy. Companies struggling with mounting debt could be in trouble to meet higher interest charges. This could also result in a sharp economic decline, which would also be bad news for stocks.
In short, there’s a wide range of risks that could trigger a stock market crash after an interest rate hike. A notorious market veteran recently made the headlines saying that situations like these always end badly, especially considering that most investors are blindly relying on the assumption that the Fed will prop up ‘the most extreme valuations in history’ — and warned that stocks are due for a crash of nearly 70 percent. According to John Hussman, the president of the Hussman Investment Trust, investor are clearly misunderstanding how Federal Reserve stimulus actually supports markets. “Its real effect is on investor psychology,” he said. Put it simply, even if the central bank keeps injecting more liquidity in the market, it doesn’t mean that stocks will remain at record highs or be immune to poor performance.
Hussman highlighted that this speculative investor behavior will have catastrophic consequences. On one hand, current valuations – which Hussman argues are the “most extreme in history” — are increasing the possibility that future stock market returns are severely muted. According to Hussman’s model, the S&P 500 will return -6% over the next few years. The investor revealed that to measure valuations he uses the ratio of total market capitalization to gross corporate value added. In his view, this is the most reliable predictor of future stock market returns in terms of valuation measures. Hussman suggests that we’re now heading to the worst-case scenario, in which stocks crash by 66 percent to return to normal valuation levels.
The market veteran explains that “valuations are far extended beyond norms, by many measures,” and “they will eventually come back to their norms, by the law of equilibrium”. And because a massive stock market crash is on the horizon, and valuations will eventually return to norms, he predicts that stock market returns in the years ahead will be terrible. In other words, there’s no way to avoid the coming stock market crash. The bubble has grown too much to simply deflate. Instead, what we’re about to witness is a devastating burst. Many other Wall Street veterans have also been warning that stocks ate way too extended at the moment and that the bubble is one trigger event away from popping.
All of these warnings were added to a long list of warnings issued by a horde of investors, economists, financial analysts, and market watchers over the past few months. Unfortunately, most investors are choosing to overlook the risks and go all-in in this chaotic frenzy. No wonder why Hussman says all of this will end in tears. Whether you believe it or not, an apocalyptic stock market crash is right at the corner, and while some are already running scared and repositioning while they still can, the vast majority of investors will have to learn the lesson the hard way and deal with the carnage just because they have decided to do nothing.
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