Eventually, the doomsayers and the hilltop screamers will be right – the market will crash. Periodically, it just does – 1929, 1933, 1987, 2000, and 2008. The reasons are always clear, after the fact, but up to the point the market crashes, the sentiment is often bullish, extremely so.
- According to the Lindsey Group’s Peter Boockvar, bullish sentiment is at levels even higher than they were in December 2013, October 2007, and August 1987, and we all know how that ended.
Does the above information mean the market will crash soon? Does it follow that when the bulls feel good, the market inevitably crashes? Coincidentally perhaps, but underneath all major market crashes runs a current of consistently bad economic data, or there is a systemic financial problem, or there is a large bubble that has formed in the market.
The Dot.com crash in 2000 and the Black Monday crash of 1987 are examples of a bubble and the market crash in 2008 is an example of a bubble, a systemic financial problem, and a recession all coming at once.
The crash of 1929 came about from a market bubble and economic problems and the 1933 crash happened because of economic problems and a systemic financial problem, much like what happened in 2008 – the banking system failed on top of a recession.
My point is this – anything can happen in the market because of market psychology, but when a big market crash happens, there is an underlying issue, an issue that is big, big enough to cause panic in the market, big enough to wreak havoc.
Is there now a market bubble similar those that precipitated the 1987 and 2000 crashes? Is there a recession looming such as there was in 1929 and is there a systemic financial problem such as the ones that preceded the crashes in 1933 and 2008? Not that I can see.
The current cry of the naysayers is this bull market is five years old and that the return on the S&P 500 in 2013 (30%) points to an overvalued market, a bubble if you will. Perhaps the market is a bit ahead of itself right now, but the last few days has taken the overvalued aspect out of the equation and so far in 2014, the return on the S&P 500 (4% or so) suggests a rebalancing of the extraordinary 2013 return.
As to a systemic financial issue, the opposite is true. The financial system is re-regulated and becoming more sound every day. As to an economic issue, well, I have written plenty about the positive nature of the US economy, and even though the International Monetary Fund (IMF) recently downgraded its GDP forecast for world growth in 2014, there is ample room to grow, at least according to the IMF itself.
- Global activity has broadly strengthened and is expected to improve further in 2014–15, according to the April 2014 WEO, with much of the impetus for growth coming from advanced economies. Although downside risks have diminished overall, lower-than-expected inflation poses risks for advanced economies, there is increased financial volatility in emerging market economies, and increases in the cost of capital will likely dampen investment and weigh on growth.
Increases in the cost of capital will not happen any time soon, at least for a year or more, according to the Fed, and the European Central Bank is in no hurry to raise rates either. Add to this Europe is getting healthier economically and China is, well China, on and off (mostly on) in its attempt to realign its economy.
- Euro zone industrial output rebounded with a twice-as-strong as expected monthly rise in April thanks to energy and non-durable goods production, official data showed on Thursday, pointing to an acceleration of economic growth in the second quarter.
- China’s industrial output and retail sales increased at a faster pace in May, adding to evidence that Premier Li Keqiang’s support measures are stabilizing the world’s second-biggest economy.
So when the crowd gathers to hear the apocalyptic prediction of the hilltop screamers, stop in, listen, smile and then walk away, and when the celebrity analysts tell you their charts point to a market crash, or when the survey says the bulls are extremely bullish, which suggests a market crash, think about what I wrote today – the market needs a big reason to go down hard. Do you see a big enough reason for the market to crash?
Trade in the day; invest in your life …
