All You Need To Know As To Why The Stock Market Doesn’t Crash
Experts have been calling a stock market crash for some time. Even as the markets bounced back after the Covid slump, persistent metrics implied it was overvalued. However, so far, these predictions have failed to materialise, leaving investors with several questions about whether the market will crash, go through a correction, or just keep on rising
Warren Buffet Indicator
The Buffet Indicator, which compares the market cap to the GDP, is at 133% globally. This number is a record high and well above its readings during both the financial crisis and the dot-com boom.
Buffet’s beloved market gauge suggests that any reading over 100% indicates that the global market is overvalued compared to the world economy. However, the picture is a bit more complex this time around.
Low bond yields and interest rates have reduced the places for capital to earn returns. Throw the potential growth and earnings of tech stocks on top, and it may be that the pandemic has artificially inflated these levels because of how it hit GDP. In other words, as the economy powers back on, GDP should rise and reduce the Buffet indicator.
What Else Does The Data Say?
Of course, the Buffet Indicator isn’t the only metric that is bearing bad news. The S&P 500 has a record price-to-sales ratio. Additionally, it’s also posting a record margin debt. These figures have led some analysts to believe the market could shed over 50% of its value in a crash.
The current S&P 500 P/E stands at 44.85. The number is staggeringly high but inflated by the Covid economy. However, some analysts note that pre-Covid, the number was at its highest since the 2009 financial crisis.
Additionally, CAPE and Adjusted CAPE (Shiller PE ratio) suggests an earnings adjustment closer to $120 and an overall S&P 500 value of 2620. The index has been hovering around 4200 in June 2021.
Market Volatility, Meme Stocks and Bitcoin
The stock market has been significantly volatile throughout 2021. Biden’s fiscal policy announcements, the Fed’s comments on interest rates, and unemployment figures have caused the unpredictable movement. However, some of the more extreme movements have been in meme stocks and cryptocurrency.
Meme stocks are a modern, social media-driven phenomenon. Traders on Reddit, TikTok, and Twitter have selected stocks like AMC, Blackberry, and GameStop and manipulated the prices through financial trading apps like Robinhood.
For some investors, shorting these volatile stocks looks like an attractive option. The boom and bust pattern has seen AMC Entertainment prices rise for weeks and then crash suddenly with a $10 billion sell-off.
Indeed, billionaire investor Thomas Peterffy, co-founder of Interactive Brokers, has cautioned against shorting these stocks. Peterrffy believes investors should be cautious.
After falling 70% in January, many of these meme stocks are on the rise again. Experts suggest that timing these meteoric rises before they fall back on their fundamentals is a risky game.
Additionally, Bitcoin and other cryptocurrencies have continued their volatility throughout 2021. After an incredible rise during the end of 2020, Bitcoin sat at about $30,000 per coin. In April, the price had more than doubled. Shortly after, it had crashed down to $38,000.
Some blamed regulations in China; others blamed Elon Musk tweets. For others, Bitcoin’s lack of liquidity makes it extremely sensitive, and they suggest the fall was about fears over inflation.
The stock markets’ resurgent momentum since late 2020 and early 2021 can’t last forever. However, a slow down in price increases won’t necessarily mean a crash, or a correction is due just yet.
Equity markets still look strong. At the start of the year, expert forecasts and price targets suggested a gradual, if unspectacular, rise. We’re still in a bull market, which means there are plenty of opportunities for investors to achieve returns.
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Alpesh Patel OBE