What could cause a stock market crash?
A stock market crash is a sudden collapse in stock market prices. It might be caused by a catastrophic economic or political event, such as the 2008-2009 subprime mortgage crisis or the 2000 dot-com bust. In the past 30 years, there have been seven market crashes, and some of them were followed by a bear stock market. With the market now on a nine-year bull run, doomsayers are looking for signs of an overdue economic downturn. Here are seven cautionary signs that the bull market may turn into a sleeping bear.
The Federal Reserve overplays its hand.
After five interest rate hikes since 2017, Charles Evans, president of the Federal Reserve Bank of Chicago expects several more, as the increases don’t appear to be slowing economic growth, inflation or creating excessive inflation. But one misstep could lead to a crash if “the Fed makes a mistake and hikes rates too much or indicates that they’re going to pick up the pace and/or magnitude of hike,” says Scott Wren, senior global equity strategist at Wells Fargo Investment Institute in St. Louis.
Trade wars crash the market.
Trade battles are escalating. To right trade imbalances, President Donald Trump is enacting large tariffs on China and other trading partners. China retaliated with tariffs on many U.S. goods. So far, the economy continues to grow, but, should the president escalate the tariffs causing a full-blown global trade war, the stock market could be jarred into a meltdown, says Benjamin C. Halliburton, chief investment officer at Tradition Capital Management.
International debt becomes a crisis.
With Turkey in the throes of a financial crisis and the dollar strengthening versus the Turkish lira, Turkish dollar-denominated debt is becoming tougher to repay. Compounding the problem, the Turkish lira is in a deep spiral. Greece, Italy, Spain and other European countries remain deep in debt. Despite stronger bank balance sheets, there’s no promise that a new global debt crisis won’t cause the next stock market crash. “After more than a decade of building on cheap foreign debt, the chickens are coming home to roost,” says Joel A. Larsen, principal at Navion Financial Advisors in Sacramento, California.
A subprime auto loan crisis develops.
In August 2017, Equifax reported that loans to borrowers with credit scores below 530 have reached higher delinquency rates, comparable to those in 2007. These subprime auto loan borrowers have fewer options than those with higher scores, and thus are forced to pay higher interest rates. Should the job market stumble and auto loan holders default, the U.S. might be looking at another market crash. After all, these loans are also securitized, or bundled together and sold to investors as securities. If subprime auto loan borrowers’ default, the securities that hold these loans will drop in value.
There’s a replay of the 2008 banking crisis.
Scott Thompson, president at Thompson Wealth Advisors in Charlotte, North Carolina, predicts that recently enacted looser banking regulations will initiate the next market crash. He claims 16 of the 39 systematically important financial institutions (SIFI) have declining share prices, despite rising interest rates that typically benefit banks. “Are there bad loans we are unaware of, are the banks once again involved in off-book derivatives? There is a big problem looming that no one is talking about,” he says.
There’s a slowdown in economic growth.
In the second quarter of 2018, GDP growth clocked in at 4.1 percent, and economic growth is expected to end the year at a respectable 2.9 percent. The stock market is priced for continuing economic expansion and prosperity. The current S&P 500 (trailing 12-month) price-earnings ratio is 26.64, well above the average of 15.72. Yet, as long as economic growth continues and no other surprises spook the markets, the growth might continue. But, should the economic growth stall, unemployment get out of hand, corporate earnings fall or inflation explode, a crash may be around the corner.
The political divide becomes too great to overcome.
The political climate has unprecedented divisiveness. The Mueller investigation about potential Russian collusion in the 2016 election casts a shadow over the Trump administration, raising the specter of possible impeachment hearings — a stressful national situation that might thwart the economic optimism. And don’t forget, the 2018 midterm election might flip Congress to a Democratic majority, which would likely slow Trump’s push to slash regulations, increasing negative sentiment on Wall Street.
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7 Things That Could Trigger a Stock Market Crash originally appeared on usnews.com
