Headlines Talk Market “Crash”, Should You Be Worried?

August 1, 2018  |  Michael Reilly

If you’ve kept an eye on market news headlines over the past month, even casually, you’ve probably seen a lot of “doom and gloom” predictions.

Of course, this is nothing new. The media loves a good sensationalist story with a catchy headline, and a quick scroll through anyone’s newsfeed is likely to turn up at least a half-dozen or so of these pieces.

For example, on July 27, The Motley Fool published a story titled This Favorite Warren Buffett Metric Tells Us a Stock Market Crash Could Be Coming.

The article takes a look at “The Buffet Indicator”, a metric calculated by dividing the total market capitalization of all U.S. stocks by the latest GDP.

They’re quick to qualify their statement, saying “no stock market metrics are 100% reliable”, but that doesn’t stop them from pointing out that the Buffett indicator peaked at about 145% before the dot-com bubble burst (a percentage higher than 100% indicates stocks are expensive).

At the time the article was written, the Buffet metric was sitting around 148.5%. In fact, the piece points out that the total market cap to GDP ratio has never been higher…which sounds pretty grim, even if you’re not familiar with this particular metric.

A few days later, on July 31, Fox News published an article titled Bank Warns of Impending Market Crash. The article quotes analysts from Morgan Stanley who apparently believe “the markets are about to experience the biggest correction since February”.

And, the same day, MarketWatch published not one, but two pieces of pessimistic market analysis.

The first, titled This ‘prophet of doom’ predicts stock market will plunge more than 50%, mainly focuses on the words of John Hussman. Hussman is the president of Hussman Investment Trust and is sometimes referred to as the “stock market’s biggest bear.”

Although Hussman has notoriously made some pretty big mistakes with his calls in the past, the piece quickly glosses over this and goes on to explicitly detail his doom and gloom predictions. These include estimates that the current cycle will result in market losses of -64% for the S&P 500, -57% for the Nasdaq-100, -68% for the Russell 2000, and -69% for the Dow Jones.

If that wasn’t enough to stress you out, MarketWatch’s second article of the day, titled Prepare for the biggest stock-market selloff in months, Morgan Stanley warns, might just do the job.

This article mostly picks out the same quotes as the piece by Fox News and again warns of the possibility of an imminent correction.

At this point, it’s probably clear that a lot of the major market news sites are hopping on the “fear train”, probably just in an effort to get as many clicks as possible.

As we’ve said before, at Rowe Wealth Management we use Relative Strength (RS) and lots of other technical analysis to make our investment decisions, and avoid exactly the kind of “fear mongering” we see in the articles highlighted above.

So, what’s RS saying about this supposed “imminent crash”? Are we running for the hills as well?

Not exactly.

Although certain parts of the market are certainly overvalued, our RS data isn’t predicting some sort of huge downturn or another “dot-com era” crash.

Instead, this is typical fear mongering that occurs right before the mid-term elections.  We don’t do high level investigations into the intentions of those with the, apparently sudden, stock market jitters. But the financial-pro community certainly has a history of price manipulation.

If they know it’s likely that we will see strong upside in the near future, then its in their best interests to knock prices down to a level where they can come in and buy on the cheap.

Consider the stock market’s “presidential election cycle.”  Historically, the strongest time for the stock market is from the mid-term (this year) stock market low through the pre-election year’s (next year) stock market high.  

Mid-term election years are notoriously weak.  

We aren’t going to think too hard about why the market would trade up or down.  Instead, we think about proof of what’s really happening.

What’s really happening, is the U.S. stock market is the strongest of the six asset classes.  

Here’s the order of the six asset classes (from high to low) at the time of this writing:

  1. U.S. Equities
  2. International Equities
  3. Commodities
  4. Fixed Income
  5. Cash
  6. Currencies

So, where should concerned investors go from here?

This may be a good time to get in touch with your financial advisor and ensure they’re not falling prey to all of these fear tactics flooding the news.

If you have concerns about your portfolio don’t hesitate to schedule a consultation with one of our advisors. We can take a quick look at your holdings and compare them to our RS data to ensure you’re not in a position of weakness.

Even if you don’t want to delve too deeply into your own portfolio, feel free to schedule a call if you have any questions about the current market and what we’re seeing in the world of Relative Strength. We’d be happy to help you avoid the “fear factor” and rest well, confident in your investment decisions.

Click here to see available appointment times.

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