When Will The Stock Market Crash? 5 Signs Experts Watch For
When will the stock market crash? It’s a super-common question that every financial expert pretends to have a set of signs to be wary of. Between you and me, signs vary.
We’ve all seen Margin Call and The Big Short, two movies that prove a tiny percentage know something is happening as it happens, while the rest of us get shafted. So a better question than “when will the stock market crash?” is “what are the signs of a stock market crash?”
Most Experts Just Don’t Know
In all honesty, the majority of telltale signs experts talk-about in their doom-and-gloom blogs, and books are more about the economic health of a country overall. Most experts glaze over the truth — we self-confessed experts just don’t know when a crash is coming.
For instance, I know how to research a stock, I know how to read the indicators, but that means very little in a stock market that’s a living breathing roller-coaster made up of corporations, each of which has their own trials and tribulations. I could watch 1,000 companies daily and still miss an impending crash. Anyone who says otherwise isn’t being honest.
The best example of how experts just don’t know is by putting a spotlight on dividend stocks. According to experts, a stock paying out 55% to 75% in dividends is considered high. Anything above 95% and experts say trouble is on the way. Yet, The Coca-Cola Company (KO) has a payout ratio of 271% and is flying.
The truth is that telltale signs have exceptions, a lot of them. And this is what experts won’t always tell you.
5 Telltale Signs Of A Stock Market Crash
The above video is just one example of experts talking about an upcoming crash. We’re not saying they’re incorrect, but we don’t know.
For instance, included below are the five most commonly used telltale signs experts specifically point to in the stock market. Not including economic factors like interest rates, cost of living, etc:
- Rapid Rise In Stock Value: A rapid rise could mean a bubble, and like with any bubble it will inevitably pop. The reality is no one actually knows when the bubble will pop and the truth is that the market is constantly full of bubbles growing and popping. Most of which create some ripples due to panic-selling but rarely take down the entire market.
- When Majors Issue Debt: Another telltale sign according to experts is when a major company, like Apple or Google issue debt in order to drive share buybacks. On the flip side, this happens on and off with majors all the time, mostly when they’re making a change or trying to mitigate future demand.
- When The Volatility Index Gets Flagged: The VIX (Volatility Index) measures the top stocks on the S&P 500 and is known as the fear index. If it goes up experts say it is a sign of an impending crash, if it goes down, it is a sign of investor overconfidence. Effectively, whichever way it goes it means something, ironically that’s true for every tool and measurement used in the stock market.
- Mergers and Acquisitions: When companies start to buy up each other or merge due to low-interest debt opportunities, some may go a little too far and cause an implosion in a sector. Normally what happens is a company will then have issues with revenue, stock demand lowers, and ripples impact the market. However, it is unlikely that this will cause a crash. It just means some investors will get shafted.
- Increasing Number of IPOs: Last and definitely least is the frequency of new Initial Public Offerings (IPOs) in a sector. It is usually a sign that companies are trying to cash in on a bubble or that there’s a bubble in investor interest. Either way, experts see it as a sign of interest. And yet supply and demand is the driving force of the market, so interest should be a positive rather than the sign of a crash.
CHECK OUT: Our beginners guide to market indexes.
The Biggest Threat To The Market (Personal Opinion)
- When you look at the five signs, there’s one thing they have in common. A focus on immediacy.
- Ten years ago the outlook from analysts was three years. Now it is three months. This shift in where investment goes is the biggest risk to capital in the market, and ultimately a risk to the market.
- Too many are looking for short-term gains and as the market is driven by sentiment and demand, focusing on what will be profitable in three months is a risk, as a company is about long-term potential, not short-term revenue.
- This is why your own research and due diligence is vital.
The one takeaway every investor or potential investor needs to know 100% is that from the moment your money leaves your bank, it is at risk. It doesn’t matter how good the expert is, how great your research is, or how lucky you’re feeling today, it is at risk no matter how up or down the market is. So always look at the track record of a company before making any decisions.