If this was a test, which phrase does not belong with the other two when trying to evaluate, if a stock market crash prediction is real or just doomsayers forecasting the worst for the financial markets:
- moving averages
- stock market news
- quantitative valuations
For me, if you want to know where the stock market is going you can cross out stock market news. This includes all the gloom and doom written by experts.
One of the worst things you can do as an investor is worry about predictions of stock market doom. Why? Because the result will be your doubts will start to have doubts. I can remember right before the market took off in the 1980s people were predicting the next 1929 crash. Check back over the last year even all the predictions of another black Monday or Tuesday or the next Great Depression. It makes great news to write negative things, but often times the market already has accounted for all the things people have speculated on.
Learn from Odysseus about how to invest in the stock market
The reason is, if you are a market forecaster and are right with your financial market crash predictions, you can get on CNN and write a book. Therefore, it is in your interest as a financial prognosticator to try to predict the market. However, my advice is this, there is no way to be captain of the ship when it comes to sailing your investment portfolio if you listen to these sirens of doom. Like Odysseus tie yourself to the mast of your ship and avoid the sirens (the predictions of the stock market crash today). You need to screen out the noise.
For example, here are some current reasons the stock market might crash.
Stock market crash predictions
The following is a list of reasons the stock market, a leading economic indicator will crash. The stock market is a pretty good crystal ball for the economy. Therefore, if the economy is going down, then the equity market will preceded this.
- People micromanaging the economy are out of answers – Ben Bernanke and Obama have tried everything and nothing is working. That is because they have not asked me. What is needed is not stimulus shots,but economic healing. You need to understanding how markets work. If you want to improve the economy radically reduce governments involvement in monetary and fiscal policy. Let the markets work and they will adjust. Trust me on this, I have worked in the economy from a ground up perspective and as well as studying economics. If you reduce government people, simple humble folks will find a way to innovate, create, produce. Republicans and Democrats are guilty in different ways. Government should not be playing monetary or fiscal chess. Why? They are not smart enough. They are now basically checkmated.
- Housing market is a mess – If the forecasters are correct we will have 1 million foreclosures this year.
- Monetary policy is ineffective – Interest rates are about zero and this is not stimulating the economy, the stock market is a leading indicator. Monetary stimulus is like pushing against the wind.
- Fiscal policy has dried up – The bulwark of fiscal stimulus is done. Throwing money at a problem does not work and creates long-term inefficiencies.
- Taxes are increasing in 2011 – People will have less disposable income.
- Baby booms are retiring – in the 1990s I saw a prediction that the stock market would go up until about 2012 and then boomers would start to take money of out of the market as they retire to live, it seems this prediction was a little early. This demographic wave can not be ignored. Market cycles are correlated to demographic ebbs and flows.
- Massive debt – Federal, State and private debt is not fixed, this was the cause of the crises and nothing has changed much.
- The days are getting darker – Stock market crashes come in the fall as people’s psychology gets more pessimistic with the shortening day light.
- Gridlock in Washington – Nothing is moving and with the 2010 US elections Republican gains will make Democratic initiatives even more lame (duck).
- Unemployment is structural – The USA is getting a taste of European long- term 10% natural rate of unemployment. When benefits get extended like the 99ers, it is a sign that nothing is going to improve structurally and people get reabsorbed in an underemployment lower wage market. IT and financial managers are waiters and working retail. The US office of labor statistics announced that people are making in aggregate .7% less than last year.
- 2015 the market might improve – There have been periods of long-term flat markets, for example between 1969 and 1981 the market was basically flat.
- Ask yourself do you create anything – I do not know if I know too many Americans involved in the creation process, but rather moving paper and working on the computer. If Americans are pressing each other pants in a service economy, this is not a good sign.
- People are risk averse – With so much damage done by the market to people’s personal saving why risk it.
- Valuations are high – It depends what numbers you are looking at but according to Robert Shiller, price compared to cyclically adjusted earnings are about 20 and should be about 16, this means this the market is over valued.
If this has not scare you into thinking the stock market is going to crash what will?
Here is the reality about the direction of the market. No one knows. As long as I have been investing people have soberly said ‘these are gravely uncertain times’. Do not take council of your fears. Invest in a disciplined rational way.
Think about it, what if there is an earth quake, anything could happen, the Sun could give us a solar storm and fry us. Play to win and do not act on fear. Think about this, what if you are out of the market because of irrational fear you miss the biggest bull run in history? What if. This is why you need to be objective and not emotional about your investment strategy. I am not in the business of predicting stock market crashes. I often remind myself why I lose money investing. However, my message is this, in any time and any place you can get rich investing if you know what you are doing.
The solution to stock market crash predictions
- Some people are market neutral – If you want to research market neutral investing it is not a bad idea. This way you take market risk out of the equation, however, it will require you are long and short on the market, with the actual equity or with stock options.
- Use a very good quantitative screen on your equities picks – I have mentioned valuengine.com and moneycentral.msn.com top ten picks many times. The reason is if your individual picks are good they will fall less if a crash comes and bounce back faster on the uptick.
- Use a simple moving averages to give you signals to exit the market – Moving averages are not a 100% stock market predictor. However, they work. They have gotten me out of major downturns like in 2007 and given me the green light to get back in. Right now we are in a strange market situation, that is the S&P 500 index is dancing around the moving average. It is not giving a clear signal. I am watching is closely but will give it a month or so lag even if it crosses below the moving average. This is because if you use something like a 12 month moving average on the S&P like I do, it is a very broad technical indicator.
- The wider the base the higher the pyramid – The longer the market dances around the moving average then when the market does break out into a stage 1 then stage 2 trend it will go higher.
- What if the stock market crashes fast like a full adjustment in a week – Yes someday there will be another market panic, someday. Do not worry, most everyone will get burned just like you. Fast market drops are very hard to predict and react to. You have to either have your finger on the sell button or put stops in. My strategy is to do neither. I think there are too many false signals out there and you will be neurotic to try to time the market on a day to day basis. I am not a day trader. I have a general investment strategy and if I miss a 1929 type market crash that happens in a a day, so be it. I am not going to sit around and wait for the end of the world when there is money to be made today. And remember it is only money.
- There is always more risk being out of the market than in – Call market returns luck or skill, if you are in the market and have a plan for investing, a disciplined system, in the long run you should will make more money than the guy on the sidelines, putting his money in a bank CD and getting a free toaster.
- Global markets – When one market is up another is down. If you enjoy reading about economics and stock markets, this is the right time to be alive because the world is full of opportunity. You can invest in almost any type of asset or equity anywhere in the world. There is always somewhere the market is going to do well.
So what is the take away from this post? The stock market might crash as some have predicted, but so what. I am investing with my system (when the signals are right) as I have done for years. Some years will be good and some will be bad, but I am playing to win and will. There is generally more risk of being out of the Stock Market than in. Develop your own investing systems and make your capital work for you.