The Stock Market Forecast for the Next Three Months (Q3 2017)
Various signals point to a dangerous overheating of financial markets and a poor memory of what they experienced in 2008. Therefore, investors should beware the stock market forecast for the next three months (Q3 2017). This is especially true for the U.S. markets. The stock market outlook is cautious at best, but the third quarter of 2017 looks particularly vulnerable to shocks.
Before any analysis or general stock market prediction begins, it’s important to establish a factor that many have overlooked about the stock market forecast for 2017. The financial leverage levels of U.S. companies have risen significantly since 2008. Meanwhile, the market capitalization levels of such companies compared to their price-earnings (P/E) ratios are downright ridiculous.
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Even Europe, which many had given up on as a basket case, seems to be doing better than Wall Street. In the United States, many are calling out the markets for jumping headfirst into another 2008-style subprime crisis. That’s why investors should not be wondering about whether the markets are heading into turbulence. In fact, there are experts predicting a stock market crash.
When Is the Next Crash Going to Happen?
The timing is all about getting the right trigger. The black swan event that provokes a domino effect is unknown. That’s the nature of black swans; you can’t predict them. Black swan events work like the best-written effects in a well-crafted horror movie. Audiences (or investors, in the market’s case) cannot see the dangers that lurk behind seemingly-secure situations.
But investors can definitely identify the dangers to the U.S. economic outlook. They understand the risks that triggered them after the fact.
One thing is certain. Market performance does not follow a fixed pattern that can be predicted with pinpoint accuracy. Nobody knows when the next market crash is going to happen. But wise investors—that is, those who pay attention to various factors and to market history—are likely seeing that the current bull market makes little sense. Just look at the collapse of U.S. retail to get an idea.
Wall Street is not just experiencing a case of “irrational exuberance.” It’s experiencing, irrational expectation. In 2008, just before the Lehman Brothers collapse, mortgage-backed securities and the convoluted—almost criminal—machinations behind them brought down the house. My choice of the term “house” is not meant in irony; Wall Street was indistinguishable from Las Vegas.
Wall Street in 2017 Is Like Pompeii in 79 AD
With its corruption from toxic debt and risky derivatives in 2008, Wall Street was like Pompeii in 79 AD. The volcano Vesuvius had sent numerous signals in the form of earthquakes for at least 15 years before the big eruption on August 24 of that year. But the people of Pompeii decided to ignore the signals. Life was just too good in Pompeii. Until it wasn’t.
It all evaporated in a flash. Residents suffocated from the gases. Because of the petrified ash that preserved their outlines and facial expressions, historians have grasped the full scale of the fear as they tried to save themselves.
The faces of those who lost all their savings show the same expressions of bewilderment and desperation as the Wall Street bankers and brokers who just lost their jobs and savings. It’s all great until it isn’t. Everyone ignores the signs of trouble; it’s natural to do so. They ignored the signs in Pompeii, and they ignored them in New York in October 1929, just like they ignored them in September 2008.
They are ignoring the signs again in 2017. Superstitions aside, so many shock events seem to occur at the end of the summer or shortly thereafter. The nice weather—in the northern hemisphere—sets us up. It makes us less alert and we are more optimistic. That’s why the next six months—including the stock market forecast for the next three months—is wrought with pitfalls.
There’s no guarantee you will identify most of the pitfalls. You would be lucky to get a handful right. But there are patterns that many seem to be overlooking, even though they are shouting louder than Celine Dion can sing “My Heart Will Go On.” One of the ear-shattering risks that doesn’t appear to have caught investors’ attention plays a familiar tune: subprime.
In 2008, the subprime mortgage was the pothole that interrupted the bull market. In 2017, the pothole that sends the bull market to a screeching halt could come in the form of subprime car loans. The sum total of such car loans at the end of 2016 was some $1.17 billion, up 70% from the lowest peak in 2010.
Even worse is the fact that subprime auto loan debt has become a tradable commodity. Talk about alchemy. Subprime auto loan debt has produced some $5.9 billion in auto loan-backed securities. Meanwhile, fewer borrowers have paid off their auto loans early, sounding creditors’ alarm bells. American consumers are struggling to pay off their debts. (Source: “Another Warning Sign Flashes for Subprime Auto Loans,” Bloomberg, May 30, 2017.)
But auto loan debt is hardly the only sign of trouble. Household debt affects even those who have not purchased a car. U.S. households have some $12.73 trillion in personal debt. This is more than they did before the 2008 financial crisis.(Source: “US Household Debt Surpasses 2008 High, Hits Record $12.7 Trillion,” Zero Hedge, May 17, 2017.)
U.S. Households Are Back at It in Grand Style
U.S. households have returned to debt in a grand way. Some suggest that it’s not all that bad. The theory for such an optimistic assessment is that the debt means households have cleaned up their accounts and can borrow again from their bankers. But, if they can borrow again; they can fall back into the same pattern of usury that fueled the 2008 crisis. Indeed, just about every major financial crash occurred when someone realized that there’s too much debt.
Yes, analysts who suggest that the resurgence of household debt shows that consumers have generally improved their credit ratings to the point they can borrow again are not wrong. But they are only pointing out one side of the situation. The fact that households are borrowing to such an extent means that they cannot afford to live on the salaries they earn. They have to borrow to afford what have become necessities—not luxuries.
For example, owning a car in the United States is hardly a luxury. Unless you are a resident of Manhattan or another of the five boroughs in New York City—and possibly Chicago—public transportation is not convenient. People rely on their cars, sometimes reluctantly, to go from home to work and back. This has become one of the central paradigms of American society. Likewise, cell phones, computers, and the Internet are necessities. Many people rely on these tools to earn a living.
Yet, they are earning too little to be able to even afford their work tools. Meanwhile, such levels of debt, far from being an element of renewed optimism in financial institutions, suggest that the U.S. economy is literally running on debt! The debt carries risks, evidently. Some have packaged those risks into instruments, which they sell, spreading that risk like a plague during the Middle Ages. Eventually, it affects everyone and it could creep up to Wall Street in the next few months. All it takes is a trigger.
The Student Debt Time Bomb
Then there’s the problem of student debt. Chronic student debt hurts young graduates even in the best of cases. That is, when they are lucky enough to find gainful full-time employment after college. Student debt can prevent young people from buying a house, while always keeping them on the verge of defaulting. That’s, after all, what happened with the subprime mortgage crisis. The homeowners lost jobs or were earning too little to pay back their agreed-upon mortgage amounts.
The cost of studying at American universities has erupted lately. It represents some 10% of the total debt amount contracted by households. It used to amount to three percent just a decade ago. And that’s when the subprime crisis erupted. This increase in indebtedness comes at a time, however, when the economy is supposed to be growing. But, really, it is not growing anywhere near the levels some had expected.
President Donald Trump appears not to have given up on a three-percent annual GDP growth rate for the economy. There are few who still share that favorable sentiment. Let us consider for a moment the geopolitical risks that have been developing lately. These alone could spark a crisis, given the extent of the overvalued stocks. Combine them with the extreme debt levels and the current market bubble, and the risk of the next stock market crash becomes clear.
There is the risk of a Trump impeachment and also the risk of terrorist attacks. There is the risk of the war in Syria worsening as the United States meddles in Syria, which could prompt Russian retaliation. There is a risk of terrorist events—and, as seen with the Washington D.C. congressional baseball game shooting, terrorism can come from various sources. The struggle between Trump and the establishment has weakened the fabric of the U.S. society. The death of the American student Otto Warmbier, who returned to America after falling into a coma while being held prisoner in North Korea, isn’t going to ease diplomatic relations between Washington and Pyongyang.
As for the economy, a strong correction may also be caused by Federal Reserve Chair Janet Yellen making too sudden a move, raising interest rates. Or it could begin in Europe, as the European Central Bank might also act too hastily, raising interest rates prematurely.
There is no shortage of even more critical financial concerns: the precarious debt sustainability of virtually all developed economic systems (public debt + corporate debt + private debt) and the structural fragility of the banking system, with its derivative exposure of $227.0 trillion.
