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Despite $1.0-Trillion Market Caps, a Stock Market Crash in 2019 Is Likely Lombardi Letter 2018-09-14 11:50:34 FANG tech stocks apple inc. amazon.com household debt facebook tesla motors tech giants Despite market cap success to the tune of a respective $1.0 trillion dollars for Apple Inc. and Amazon.com Inc., there’s a real risk that tech stocks will trigger a major stock market crash in 2019. Amazon Stock,Amazon.com,Analysis and Predictions 2018,Apple Stock,Facebook,News,Stock Market Crash,Technology,U.S. Economy https://www.lombardiletter.com/wp-content/uploads/2018/09/stock-market-crash-all-150x150.jpg

Despite $1.0-Trillion Market Caps, a Stock Market Crash in 2019 Is Likely

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The Tech Stocks Pose the Biggest Risk of a Stock Market Crash in 2019

Despite market cap success to the tune of a respective trillion dollars for Apple Inc. (NASDAQ:AAPL) and Amazon.com, Inc. (NASDAQ:AMZN), there’s a real risk of a major stock market crash.

Pundits reveled in Apple’s achievement, Amazon a little less enthusiastically; it was only the second company to hit $1.0 trillion. Still, Apple and Amazon stock’s valuations, implied the coverage, were presented as great news for everyone.

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But was it? Unless you happen to have invested in those companies years ago, there’s little to celebrate.

The stock market and equities started to dominate business and general news headlines around the mid-90s. Since then, the media has touted companies and stocks achieving major milestones as something for everyone to use as an excuse for an on-the-spot dance.

Stock markets, admittedly, produce a contagious effect. A stock market crash is especially contagious.

Even those who don’t have an actual stake in the performance of this or that stock can engage in a share rally, or a crash for a bit of schadenfreude in a way that could only be compared to fans at game seven of the World Series. In stocks as in sports, especially when it comes to the fans, the first things that disappear are rationality and common sense.

How does this relate to Apple Inc. and Amazon.com, Inc. being worth $1.0 trillion each? Many investors will take this as a sign to keep pushing.

It’s a Tough Sell, but the Tech Stocks Pose a Threat

No doubt, the fact that the Dow Jones continues to close near 26,000 points, just 600 points or so shy of the record from January 2018, shows that many believe just that.

Apple and Amazon’s achievements have spread enthusiasm throughout Wall Street. Few have stopped to think that whatever the valuation, the market caps represent investors’ expectations about their future earnings—not the future earnings of all listed companies.

Thus, we can revel and admire how Tesla Inc (NASDAQ:TSLA) stock, despite evidence of stock price manipulation, poor product quality, failed deadlines and production targets, and a CEO smoking a Cuban-cigar-sized joint during a live TV interview, remains in contention.

Yet contagion can operate both ways. The engine of the markets runs on greed and fear. Greed stimulates the “buy” instinct, while fear, of course, pushes panic, sell-offs, and, ultimately, a stock market crash.

Given that Treasury yields have been rising (the two-year has just achieved its highest yield since 2008), the bond markets could set off a market sell-off.

When Investors Start Looking at Treasury Rates, Watch for Contagion

Those very investors who have bought a few too many equities could decide to move over to Treasuries and bonds. That could trigger a stock market crash or, at the very least, a correction.

And then there’s the variable that nobody seems to have considered: could it be too obvious?

It’s the variable of economic growth. The stock market—though many, myself included, find it little different than a Las Vegas casino—purports to reflect the state of the economy.

A Disconnect Between the Economy and Wall Street

However, there has been a growing disconnect between the economy, economic growth, and equity performance.

In the past 10 years, as we approach the 10th anniversary of Lehman Brothers’ blow-up and the official start of the deepest recession since the 1930s, we’ve had the illusion of economic growth.

Having dropped to an unprecedented bottom for the post-World War II era, there was nowhere for the economy to go but up. Even if millions of families around the world endured unemployment, hardship, stagnant or reduced wages, when you start from the bottom, any sign of growth starts to look like an achievement.

A 10-Year Economic Expansion?

We are told that the global economy has expanded for the past 10 years now. It has. However, it has merely restored pre-2008 levels of economic output.

From 2008 to the present, the United States continued to grow, but at a much slower pace than the previous decade. However, the European Union saw a sharp decline in growth and has yet to recover. In fact, it could be heading into some headwinds, as the European Central Bank has decided to start lifting interest rates.

Debt remains one of the open secrets of the past decade of growth, regardless of country or region. Debt, both household and public, has risen.

If some financial corporations have slimmed down their debt, other companies—those in the “real” economy—have used debt to boost profits (explaining the stock performance). Yet household debt has gone from an estimated $787.0 billion in 2008 to about $6.5 trillion in 2018. (Source: “$250 Trillion in Debt: the World’s Post-Lehman Legacy,” Bloomberg, September 13, 2018.)

Therefore, as interest rates go up everywhere, governments and enterprises will no longer be able to afford refinancing and loans (to fund growth).

And Then There’s the Clincher

As consumers are also strangled by debt and more difficult borrowing conditions, they won’t have the means to keep buying, and therefore keep the economic merry-go-round spinning.

The economy, despite the magic formulas that economists like to use, still runs on basics. If people have the means to consume, they allow companies to earn profits. Without profits, the stock markets suffer.

This does not bode well for stocks in 2019. The fate of the markets hangs in the balance of monetary flow and growth. If money is tight, then economic growth and equity valuations suffer.

It May Be Time to Pull Out of FANG Stocks

One of the sectors to watch closely is tech. Technology stocks continue to dominate Wall Street.

It’s only logical to expect that a loss of confidence in one or more tech companies could trigger a stock market crash.

As noted earlier, Amazon and Apple have both joined the trillion-dollar club in market capitalization. And they’re just the tip of an Everest-sized iceberg, seeing as the Nasdaq, the very symbol of the tech stocks, achieved an intraday record of over 8,100 points at the end of August.

Facebook, Inc. (NASDAQ:FB), Amazon, Apple, Netflix, Inc. (NASDAQ:NFLX), and Google (now Alphabet Inc [NASDAQ:GOOG]) stocks (the “FANG stocks”) and their Chinese counterparts, such as Baidu Inc (NASDAQ:BIDU) and Alibaba Group Holding Ltd (NYSE:BABA), remain popular with investors all over the world.

Yet despite the indicators from all points of view, consumer appeal, and stock exchange value that tech stocks are producing unbelievable results, they’re running out of magic dust.

Beware Biting the “Apple”

It’s time to be cautious about biting the “Apple.” Or rather, watch Apple stock and the FANG stocks closely, because they account for an ever heavier weight in the S&P 500, arguably the primary index on Wall Street. (Source: “Technology stocks make up too much of the S&P 500, so the index has a big move planned for Google, Facebook,” CNBC, August 6, 2018.)

In other words, if one sneezes, such as Facebook did over the personal data breach scandal, they all catch a cold, spreading it to the rest of the markets.

The Deeper They Drop, the More FANG Will Affect Global Markets

Given the tighter credit picture, consumers will have less money to actually buy the products the tech giants are producing.

It all comes down to basic numbers: there are only so many “iPhones,” the market can absorb, no matter how new and shiny. And Apple Inc., perhaps the very face of American technology and market prosperity, has become exceedingly reliant on iPhones for earnings by as much as 50%.

Simply put, the general economic situation can no longer allow the tech giants, the FANG, to grow at the same pace as before.

The inhabitants of the Earth are limited and their money supply is being cut short. Google has already gone everywhere it can, and so has Facebook.

Trump’s anti-China tariffs and attitude aren’t going to help the social media giants to gain access to the Chinese market and Amazon faces competition from Alibaba.

It might be prudent for investors to avoid being greedy, start locking in their profits, and look for other sources of earnings.

Better yet, in the current climate, they might want to start looking for ways to protect their savings and consider the good old traditional assets that never go out of style. Like gold, for example.

Editor’s Note: Hi, Alessandro Bruno here. If you enjoyed this article, you can get more of my opinions and commentaries in our popular newsletter, Lombardi Letter. Published daily, it’s FREE! Join us when you click here now.

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