This page has been archived and commenting is disabled.
5 Reasons Why The Market Won't Crash Or Will
Submitted by Lance Roberts of STA Wealth Management,
Paul LaMonica, whom I have spoken with several times, recently wrote a piece for CNN Money entitled "5 Reasons Why The Market Won't Crash." One of the biggest mistakes that investors make is falling prey to cognitive biases that obfuscate rising investment risks. This is why I am particularly fond of articles, such as Paul's, as it allows us to look at both sides of the investment argument.
So, while I do not disagree with Paul's arguments for a continued bull market, I will provide the counter-points.
[Disclosure: As a money manager my portfolio models are fully allocated to the markets currently. However, it is less important for me to understand why the markets will continue to rise, as I am already allocated to equity risk, than to know what could potentially subtract a significant portion of my client's capital. Getting back to "even" is not a long-term investment strategy I choose to employ."
"What if I told you this is only the beginning of a great run for stocks which may last another dozen years? And that while the bull may be aging, it's -- like Jake LaMotta -- still raging?" - Paul LaMonica, CNN Money
1) No Recession In Sight.
Paul states:
"Bear markets often occur around the same time as severe economic downturns. The 2008 credit crisis. The 2001 recession following the dot-com meltdown. The oil shock of the mid-1970s.
There aren't any signs pointing to a recession now. The U.S. economy has pretty much plodded along for the past four years. Yes, it's a frustratingly weak recovery. I've called it the low and slow barbecue recovery since 2010. But it's still a recovery."
While Paul is correct that major market corrections tend to coincide with recessions. However, recessions are never been identified in advance, not even by National Bureau of Economic Research which is the agency that dates the start and end of recessions. This is due in part to:
- Building optimism (particularly in sentiment survey's such as the Fed regional manufacturing surveys) that tends to run ahead of underlying economic realities, and;
- The heavy revisions to past data.
For example, in December of 2007, I wrote an article that stated:
"We are either in, or about to be in, the worst recession since the Great Depression."
It was until December of 2008 that the National Bureau confirmed that the recession started a full year earlier.
Alan Greenspan saw no recession going into 2001. Ben Bernanke stated "subprime was contained" and that the U.S. was in a "Goldilocks economy" in 2007. Both were dead wrong. In fact, going back in history, no one ever saw a "recession" coming until is was after the fact.
What is important to notice is that the current trend economic growth is no longer advancing, but declining. While this is not "absolute" evidence that a recession is on the horizon, it has been a precursor more often than not.
2) The Fed Is Still Your Friend
Paul:
"The risk of the Federal Reserve crashing the stock market with huge interest rate hikes is virtually non-existent. It's painfully clear to investors that the Fed will start raising rates next year.
The Fed's key rate has been near zero since December 2008. So even if the Fed pushes it back towards 1% next year, that's not cripplingly high. And market experts said investors will be ready for rate hikes since Fed chair Janet Yellen will go out of her way to foreshadow them in speeches and Fed policy statements."
Recessions occur due to several factors that affect the underlying drivers of economic growth. Rising interest rates and inflation are two of the most important. While Paul is correct that the Fed will likely start raising interest rates, what is potentially missed is that while 1% may not seem like much, it is all relative to the rate of underlying growth. If the economy was growing at 3-4%, then a 1% increase in borrowing costs, which creates a drag on economic growth, could likely be absorbed. At a very sluggish 2% growth, such an increase is far more insidious.
I recently discussed the following chart in "Analyzing The Impact Of Fed Rate Hikes,"
While not every set of rate hikes led to a recession as I stated;
"Most importantly, the number of times that Federal Reserve has hiked interest rates without a negative economic or market impact has been exactly ZERO."
3) Sentiment Still Skittish
Paul:
"CNNMoney's Fear and Greed Index, which tracks the VIX volatility gauge and six other indicators of sentiment, is back in Fear mode. It was showing Extreme Greed signs just a month ago. This might actually be a good thing."
Since I don't know how the CNN constructs their "Fear & Greed" index, I can not directly comment on its current readings. However, sentiment readings are not useful in determining long-term market trends as the swings from "greed" to "fear" occur over very short time frames. As I addressed in: "Stocks Will Rise and 3 Trades You Can't Make,"
"Yet, despite these warnings, individuals are as heavily allocated to the markets currently as they were prior to the financial crisis."
[Note: This goes heavily against the "cash on the sidelines" theory.]
"Furthermore, while individual investors are fully allocated to the equity markets, professional investor sentiment has rocketed in recent weeks to astronomically high levels."
"While excessive bullish sentiment, low volatility, and a perceived blindness to risk are certainly noteworthy; "irrational exuberance" can drive markets higher would logically be expected."
4) Market Isn't Cheap But Isn't Overvalued Either
Paul:
"Stocks are not amazing bargains anymore. The S&P 500 is currently trading at 15 times 2015 earnings estimates -- roughly in line with what many strategists view as fair or full value for the market."
There are several problems with using forward "operating earnings" due to value the market. Most importantly, is that forward estimates are overly optimistic by 30% on average. For a full analysis of why using such measures leads to bad investment outcomes read: "The Problem With Forward P/E's."
However, the counter to the market is "cheap" argument is contained in a quote in "Shiller's CAPE - Is It Just B.S.?,"
"Ten-year forward average returns fall nearly monotonically as starting Shiller P/E’s increase. Also, as starting Shiller P/E’s go up, worst cases get worse and best cases get weaker.
If today’s Shiller P/E is 22.2, and your long-term plan calls for a 10% nominal (or with today’s inflation about 7-8% real) return on the stock market, you are basically rooting for the absolute best case in history to play out again, and rooting for something drastically above the average case from these valuations."
"It [Shiller's CAPE] has very limited use for market timing (certainly on its own) and there is still great variability around its predictions over even decades. But, if you don’t lower your expectations when Shiller P/E’s are high without a good reason — and in my view the critics have not provided a good reason this time around — I think you are making a mistake." - Cliff Asness
5) Corrections Have Happened In The Bull Market
Paul:
"And even though it's technically, uhh, correct, to say there has been no correction in nearly three years, Connaughton reminded me that the market did have another near correction in 2012. Stocks fell 9.94% between April 2 and June 1 of that year. You can be a stickler for the rules and declare that 9.94% is not 10%. But that's really silly.
So there have been interruptions to this recent bull run. There will probably be more."
I can't argue against this point. Paul is correct. However, as I started out in this missive, I am currently long the markets in my models and intend on staying that way for the time being. However, the difference is that I am paying attention to the rising risks in the market and am not ignoring the fact that another major correction in the market, or potentially even a crash, will eventually occur. Even the famed John Bogle of Vanguard stated that investors should prepare for at least two declines of 25-30 percent, maybe even 50 percent, in the coming decade.
While the "buy the dip" mentality is deeply embedded in the current market, it will be understanding the difference between a "dip" and a full blown "correction" that will eventually separate winners from losers. As Seth Klarman of Baupost Capital recently stated:
"Can we say when it will end? No. Can we say that it will end? Yes. And when it ends and the trend reverses, here is what we can say for sure. Few will be ready. Few will be prepared.."
With that, I will leave you to your own conclusions. Can this "bull market cycle" indeed last another 12 years? Anything is possible, however, such an advance has never occurred given the current economic and fundamental variables. However, what is truly important is understanding that all investors have one "commodity" that once lost can never be regained - "time."
While we can eventually recover from a market crash, it only took 14 years to get back to even from 2000, we can not regain the time lost to save, and grow, our investments to fund our retirement. It is critical to remember that what the "index" does from one year to the next is far less important than understanding what the ramifications to your long term investment and financial planning goals will be if you are "wrong."
- 18418 reads
- Printer-friendly version
- Send to friend
- advertisements -



Blah, blah, blah, blah.
Lance is moot squared.
This chart porn doesn't even get me aroused any more.
Meh, Matrix Metrics.
Just the title of this post is laughable...i clicked into it just so I was just curious how the posters rated this...2 out of 5....
5 reasons the market will not crash
1. the fed will not allow it to do so
2.see reason 1
3.see reason 1
4.see reason 1
5.see reason 1
1 reason for not entering a place that requires you to believe you will never need to exit:
i) There are other places that don't require it
(at least the place resulting from the negation of such place).
"So, while I do not disagree with Paul's arguments for a continued bull market" = threw in towel.
Theyre both stock brokers. What do you expect ?
Are they gonna say ? "There's no real economic recovery. The banks and other large corporations don't even have to use real accounting anymore. The stock market is going up because its a rigged casino and the Fed is making & giving out chips to the banks. However, their actions have, in many ways, forced a lot of people to go into the market - if theyre going to get any return at all. What do you do, let your capital drain away earning zero ? So, you place your bets and take your chances. Who knows how long they can keep this thing up ? I sure don't. And as far as getting out ahead of time, . . . ever heard of Black Monday 1987 when the market went down more than 20% in a single day ? I can't predict anything any better than anyone else. No one has a crystal ball. I'll let you in on a little secret. The industry calls it 'investing', but its always been about 'speculating', which is damned close to gambling. There are no guarantees in life.. - - - And I'm not even going to get into the global political situation, the US dollar as reserve currency, and the national debt. Afterall, I DO want to get some customers."
1) No Recession In Sight.
Er, all we need is a negative print for Q2 and we're in a recession, n'est-ce pas?
The headline print won't be negative for Q2, but the 1st or 2nd revision sure as hell will be. Markets will probably be late to the recession party (at least a recession according to governmental statistics - aka lies) and then the crash can begin?
The crash of the slimy slush of credit derivative institutions.
he is correct, there is no recession in sight because we have been in a depression for years.
Everyone seems to ignore that massive negative print, even with the "New" GDP calculations...... What ever happened to all that pent up demand in Q2 spending?.... I'll tell you, it didn't exist. Why did it drop?... I'll tell you, every person laid off from the 2008 financial debacle went back to school, borrowed a shitload of student loans, paid off their credit card debt, used the residual to pay for living expenses, and WHAM... they graduated and spicket was turned off and they have to pay back all that money... thats why discretionary consumer spending is non-existent.
Just my observation.
You hit the nail on the head. We get a negative GDP print, and not by just a little and everyone is still recovery rah-rah. If the numbers, which are questionable anyway come up negative, I would expect those that are selling the no recovery meme to reference it a little more.
It don't crash until somebody big doesn't get paid (or accept what is given as payment). Nothing else matters at this point.
Want to see it crash? Just let me put our paltry savings back in and it will go into a tailspin.
Goldilocks economy.
And then he goes on to tell us all how to manage the worst decline since the 1930s. Bernanke will not be regarded favorably by historians.
In the future, there are no historians. Just warmin' you guys up to the concept. May or may not manifest, but it's a concept to give credence to.
Also, our story, if ever written, will not present reality as it happened. For example, Obie would be portrayed as a savior, etc.
But but but.........with all those stock buybacks, the rise in EPS is just as phony as any of the gubmint numbers.
Please stop using facts and logic. You are confusing the customers.
Blah blah blah... HOWEVER, blah blah blah.
Jeez, if you're gonna sell us narratives, at least write properly.
Oh yea, HOWEVER.
I thought the main reason the market doesn't go down is because it would be no fun to be long equities on margin if it did. Where's the profit in being long a declining market? Seems pretty obvious, really.
Observeration: Today we had 40% of the trade volume of the DOW occur in the last minute, which is very typical. How can there be that much volume, but no significant move in either direction?
You see, the marketss are very complicated... /sarc
The Fed was sucking up the offer like a Hoover Deluxe. Welcome to the Grand Illusion.
So, in the second great crash, when the Fed buys everything, that will mean the banks own everything, and it's really neo-feudal game on. Bullish farmland and .308s.
And 1reason that it will...junk bonds.
If the wee markets crash the derivatives will tear the ship apart, captain!
For some writers, I think there is an inverse correlation between the despair of the situation which they know through common-sense and the false optimism and sophistry they employ in commentary.
Good sense could never possibly entertain that in the present parlous economic situation, that there could be a protracted bull market.
Such analysis is not based on objectivity but on blind hope.
Sounds like I wasn't the only one to skip straight to the comments. Yawn.
Just breakdown for fucks sake. Even S&P to 1900 would be fun in this bizarro force FED market.
The market may not crash, and it might go to the moon, but the real economy will.
Around my neck of the woods, I see stores closing. Not just the local K-mart, which was a dead horse long ago, but mom and pop stores, eateries, computer places, hardware stores, flower shops, sandwich places, lawyer's offices, and auto shops.
When GDP pring is negative for the second quarter in a row, it will technically be a recession. Not that the market will care.
You won't be able to buy anything even if you have the money. That's how it was in the Soviet block in the 80's. People had government money, but there was nothing to buy. The real action was behind the scenes in bartering, out of the watchful eye of the authorities.
It will be the same in the USSA soon.
"1) No Recession In Sight."
There was no recession in sight in October 2007. It was confined to sub prime.
"2) The Fed Is Still Your Friend"
If you are a 1%er. The insiders sell to bag holders at the top. The FED does not care what happens to the 99%. At the bottom, the FED will be there for the insiders, just as they were at the top.
"3) Sentiment Still Skittish"
According to who? VIX was just at rock bottom.
Paul LaMonica, whom wrote a piece for CNN Money - figures - another MSM con-artist.
Listen up Paul.
Tell that hag yellen to shut down POMO and shut down REPOs and see how long your bull(shit) stays up.
Then ask that hag yellen to dispose of that $5T balance sheet (was $600B in 2009) and see how long your bull(shit) market stays up.
In conclusion, go fuck your analysis and go fuck yourself too Paul LaMonica.
"5) Corrections Have Happened In The Bull Market"
Over due for a real bear market.
"4) Market Isn't Cheap But Isn't Overvalued Either"
What is the market's value when the ongoing financial fraud is taken into account?
Enron was a 60 dollar stock until the financial fraud was accounted for.
6. Get your head out of your ass, this "thing" does not meet the definition of a Market by any measure.
"What if I told you this is only the beginning of a great run for stocks which may last another dozen years?"
What if those peaks in 2000 and 2007 are a double left shoulder high and the head is being formed to a massive head and shoulder top?
listen this market is too big to crash
The top 1% commanding 90% of the wealth do not care whether the equity market goes climbing or crash. They are trading with stop losses to skim what remains of the leveraged lemmings and the yield chasers.
Not time for them to be investing until the whole landscape is clear to pick up bargains.
Money is in bonds, commodities, currencires where they will have ample time to exit from governments before the markets are told.
They are still in the game of equity because the institutional funds (mutual, pensions, etc) are still juicy. The risk-on or risk-off sentiments of these group are the prompts for them to place the levels of their stop-losses.
The top 1% commanding 90% of the wealth do not care whether the equity market goes climbing or crash. They are trading with stop losses to skim what remains of the leveraged lemmings and the yield chasers.
Not time for them to be investing until the whole landscape is clear to pick up bargains.
Money is in bonds, commodities, currencires where they will have ample time to exit from governments before the markets are told.
They are still in the game of equity because the institutional funds (mutual, pensions, etc) are still juicy. The risk-on or risk-off sentiments of these group are the prompts for them to place the levels of their stop-losses.
I have never read such such fucking bollocks in my fucking life before.
What the fuck are you on.
Whether or not such fucking retaded morons as the fucking ben wanker can see one only afte he is forcibly fed the data for several years after the event, ..." derrr oh it was a recession then"... to see it, even my fucking cat knew in January that the US was in recession.
Mypoic wamker. Get a fucking real job
think for a moment if the market lost 50% of its value, the dolla is no longer the petro printing press marvel...and boomers get a sorry letter instead of the monthly "retirement" check...
i think ISIS / VLAD THE IMPALER would look like boy scouts by comparison ...... and that is what the fed/feds F E A R....
gubmint parasites know that john q public knows who they are and where they live....and oh by the way when the order to shoot ussa cits is issued and ignored....there aint no place to hide....
what are the p/e multiples / market indexes when deflated to say .... 1970 dollas..... apparently a dolla is $0.02 in 1913 dollas.....
the tbtf banks are nothing but intermediary pimps helping the fed avert financial armageddon.... and being well overpaid for it ...
why not just cut out the middle man and let janet buy bio and other sectors of her choice... think of the huge savings in unearned bonuses... and the suicide prevention for banksters....