Though it has had a few jitters lately, the overall strength of current market has been unprecedented, soaring past record after record in its continual upward climb.
However, no matter how strong a bull market is, it must come down eventually, and it is my opinion that a considerable stock market crash could be on the horizon.
Here are 6 reasons why I feel the stock market could be heading for tough times in the not-so-distant future.
1. Foreign Money is Flowing into the US Market
US investors aren’t the only ones who have taken note of the stock market’s strength; foreign investors have been pouring a surplus of money into the US stock market as well.
The problem with all this extra money coming into the market is that it leads to incredibly high valuations that will eventually become too high to be backed up by results.
2. Foreign Markets Aren’t Doing Too Great
Another factor behind the influx of cash into the US stock market is the fact that foreign markets are currently doing poorly, leaving US investors nowhere else to put their money but the US stock market.
In addition to foreign markets faring poorly, current bond yields are too low to be attractive to investors.
With nowhere else to put their money, US investors are, by and large, only buying US stocks, driving up valuations to unsustainable levels.
3. Real Estate is Currently Very Expensive
Stocks aren’t the only investments with really high valuations right now, as real estate is currently very expensive as well.
In fact, in late 2017, the national median for home prices was 32% higher than inflation.
In 2005, right before the housing market collapsed, the national median for home prices was 35% higher than inflation, so you can see that we are entering dangerous territory.
When the real estate market goes down the stock market follows, and the high prices for homes suggests that we could be on the verge of a collapse in the real estate market.
4. The Wilshire Index is Too High Compared to GDP
The Wilshire index – which includes 5000 companies and is accepted as the benchmark of the US stock market – is reaching enormously high levels in comparison to the country’s gross domestic product (GDP).
When the economy is being this drastically outpaced by the stock market, it’s never a good sign.
In fact, there are only a few points in history where the Wilshire index has outpaced the GDP as much is currently is, and all of those points were leading up to a stock market crash.
5. Index Investing is Driving Money into the Market
The majority of investors today do not choose individual companies to invest in.
Rather, they invest their money into an index that may contain several hundred different companies such as the S&P 500.
The problem with this is that index investing drives up valuations across the board rather than just driving up the prices of companies that are actually performing well and backing up their high price with results.
In the end, this leads to a lot of companies with average performance to have incredibly high valuations – a recipe for disaster.
6. US Policy is Driving More Money into the Market
As if the US stock market needed any more factors that cause money to flow into it and drive up valuations, current policy is pouring money into the market at an unprecedented rate.
The United States is scaling back its balance sheet by $4 trillion and encouraging companies to bring money back into the United States through tax reform.
It’s expected that these policies will dump an extra $6 trillion into the stock market over time.
This is an enormous amount of cash to have flowing into the market, and it will almost certainly exasperate the problem of high valuations.
Do you think we’re heading for a crash? If so, how are you preparing for it? Learn what Rule #1 investors are doing from my free webinar.