Odds of a Stock Market Crash Stack Higher
If you think the stock market will perform well, it may be time for you to pause and reflect. A stock market crash could be likely, so be careful if you own stocks.
Why would there be a stock market crash?
The odds are stacking against a rally. Here’s some perspective.
Dismal Economic Performance Ahead, Stocks Could Be in Trouble
Know this: the stock market tends to move ahead of the economy. It tops when the economy is about to turn, it crashes as the economic data starts to show deterioration, and it bottoms at the peak of uncertainty.
Once economic data starts to show problems, investors need to be careful. We could see a lot of selling in the stock market.
Right now, it’s becoming very clear that the U.S. economy could be taking a turn. One indicator worth paying attention to is the yield curve.
Yield curve is essentially a chart that plots the difference in yields of three-month U.S. Treasuries and 10-year U.S. bonds. Whenever this difference drops below zero for a few months, it’s a sign that a recession could be ahead.
As the below chart shows, the yield curve has been below zero since May. With this, it’s possible that a top could be in the making in the stock market.
Chart courtesy of StockCharts.com
Earnings Expectations Continue to Tumble
The yield curve isn’t the only reason to be bearish on the stock market. You see, earnings expectations are critical to the stock market. If earnings expectations are bad, we usually see a stock market crash.
Since we are almost at the end of the third quarter of 2019, earnings expectations are becoming dire.
Companies aren’t helping much in this regard. According to the most recent data, 80 S&P 500 companies have issued negative guidance about their earnings per share, while just 30 have issued positive guidance. (Source: “Earnings Insight,” FactSet Research Systems Inc., September 13, 2019.)
That means, for every one positive guidance, there are almost 2.7 negative ones. In other words, of all the companies in the S&P 500 that have issued guidance about their third quarter, about 73% of them expect their earnings per share to come in lower than expected.
Wall Street analysts are also pessimistic. At the start of the third quarter of 2019, analysts expected S&P 500 companies to report a year-over-year earnings decline of 0.7%. If you go back to the beginning of the year, analysts were actually expecting earnings growth in the third quarter of 2019.
Now they expect earnings to decline 3.6% in the third quarter. This is a massive revision to their earnings estimates!
What do you think will happen if earnings expectations continue to take a tumble?
This Is What Investors Should Focus On
Dear reader, we could be in the last stages of the bull market that began in 2009. The stock market has had a solid run over the past decade, but now the upside could be very limited.
I see a stock market crash being more likely than any major upside in the next few quarters.
I continue to preach preserving capital and being very selective. Gone are the days when you could make money by owning index funds. Individual stocks are going to provide better returns.
Also, investors should make sure they have stops in place. If the stock market crashes, the last thing they’d want to do is give away their gains.