The stock market has not been pretty as of late. All three major US indexes are in or have at some point recently dropped into correction territory, which is noted as a 10% drop. Some stock market predictions are coming out that are driven by pure fear.
The bulls that drove the stock market to more than double over the last few years have taken a break, and the bears have been more than happy to step in and finally be right. However, I think that there are some who are way off the mark.
Is This 2008-2009 All Over Again?
There are many out there who will happily tell you that the stock market is headed for another crash like the one that happened in 2008-2009 when the markets lost over half their value in about an 18 month period.
They claim that the Fed artificially propped up stock prices over the past few years. They warn that the market will return to those pre-prop levels.
Some claim that the global economy is so dire that the entire world is going to crash and burn any day!
Others just say that we're in a bubble and it's going to burst!
To all of that and any related thesis about an imminent market crash, I am very skeptical. Let me explain why.
Here are four reasons that I don't think the market is headed for a crash.
There are no signs of a foreclosure crisis on the horizon
Remember the early 2000's, when prices in just about every neighborhood were skyrocketing? 10% increases in home values a year? No problem. People could buy a home and be comfortable that they'd turn a profit in as little as a couple of months. However, as we now know this was all built on a house of cards caused by bankers giving out loans that they should never have been doing.
Look around today. While home prices have largely recovered, the volume isn't there. There's less houses being sold. This is a good thing. It means people are actually buying and selling because they need to, which removes most of the speculation that drove the previous rise and fall. While there are flippers out there, the practice is much less common and you have to actually know what you're doing to make it work.
In other words, this is a fairly normal housing market that has solid footing, and while values could flatten or even decline, the crash in prices and spike in foreclosures seems very low risk.
Banks aren't built on a muddy foundation
Remember the images of Lehman Brothers closing? People walking out carrying boxes. A giant building suddenly with no purpose. A company that had handled and been responsible for trillions of dollars and in business for well over a century suddenly….gone? We all saw the images and they hit home. The fact is, while Lehman was the only major casualty of the giant banks, it could have gone further.
Luckily it didn't.
When it all shook out, it turns out that very few banks were in great shape. Most had gotten so consumed with the housing mess that it could have all come tumbling down. Lehman wasn't fortunate enough to get another chance, but many still did.
And the results show today.
Banks now must routinely go through stress tests, where a simulated economic disaster takes place, and banks must show that they have the liquidity and the financial strength to weather the storms. When these stress tests first rolled out, very few banks passed. Now, all the major banks have showed strength and routinely passed stress tests.
Is every bank guaranteed to survive some economic event that might happen? Of course not. But, the industry as a whole is now must stronger and is not at risk of collapsing at any moment.
Unemployment numbers are solid
One argument that the mega-bears use is to point out that economic recovery is slowing. This is true, but when you compare it to a few years ago, is this really a big surprise? We were just coming out of the biggest economic catstrophe in 80 years, so when things started going in the right direction, it was no surprise that things started picking up quickly.
Unemployment stands at just over 5% today. That's the lowest in years, and while employment gains are shrinking, I believe that it's because of what the numbers show, that many people have jobs.
Many people will counter that argument by stating that the unemployment number is flawed, because many people simply dropped out of the workforce. To me, by empirical evidence alone, it's pretty clear that more people are back to work these days. I just don't see the Facebook posts of people sitting at home looking for work. I have automatic alerts about jobs in my area for my profession, and I see the number of opportunities getting bigger in number. The current unemployment numbers don't indicate a problem.
On top of that, I also think that the fact that unemployment has grown slowly and steadily over the last few years is a reason for strength right now. Many past recoveries saw job numbers grow very quickly after a recession, only to see the large gains get undone at the first sign of trouble. I believe in our current economy, employers have added jobs as they are truly needed, and the risk of them quickly unwinding the hires of the past few years is low.
Other countries do not drive us (though they can ride shotgun)
But….but…..China….and….Greece……yeah….they go down, we go down.
Isn't that what many fear mongers have been preaching over the last year? Every time China slows or Greece slows, the market goes into panic mode and the perma-bears pat themselves on the back in satisfaction.
The fact is that while we now have a global economy where things in other countries will impact us from a financial perspective, we still drive our own economy.
Let's think about this? The last time the situation in Greece came about, the stock market lost more value than the entire annual GDP of Greece! Again, I understand the situation was no laughing matter, but perspective sometimes gets lost, and those who want to see doom and gloom will latch onto any little bit of news and make it seem like the entire country was going to basically fall into the ocean and all economic activity would cease.
Greece, China, and other countries will all have issues. Will they impact us? Sure. But are they going to blow our economy out of the water?
So what does it all mean?
Am I here to tell you that the stock market shouldn't have fallen? No. Am I hear to tell you that it won't fall more? No. In fact, I could be completely wrong about everything I've said. Maybe the market will tank.
But, I don't think it will. I'm keeping my portfolio aligned with that opinion (and that's all it is).
I don't see the perma-bulls getting hold anytime soon. Will the Dow hit 20,000 this year? Probably not (though wouldn't that be nice!). But will it go under 10,000 like many seem to love to call for? I just don't see it happening.
There will likely be a lot of volatility. I think right now this is caused more by the market sensing fear and trying to shake out the weak hands. Unfortunately, if this is true, a lot of people will get shaken out, suffering losses, and then they'll miss out on the upside again.
That's what the fat cats on Wall Street loves to do to the retail investor.
Before you make a big market move, make sure you look past whatever people are saying. Everybody has their own agenda, and it may not match yours. Understand for yourself what's going on. Make your decisions from there.
You might be right and you might be wrong, but at least you won't be trusting someone else. Because let's face it, all those ‘someone elses' don't have the best interests in mind for your money despite what they say.
Readers, what do you think? Is the market headed for a crash or a rise or somewhere in between? I'd love to hear your predictions and thoughts on what's driving the market these days.