Investors Ignore Risk Again, But that Won’t Prevent Stock Market Crash
Latest Rally Is Only Going to Make the Next Stock Market Crash Harder
In recent days, I have written that the markets are moving along the usual script. They have hinted that some realism still exists. Yet, too many still see this realism as merely some much-needed downtime from all the profit taking. And they were back at it again on September 11. What could have possibly made investors continue to inflate the market bubble? They’re only going to make the sound of the next stock market crash louder.
It’s true that the present market direction is one of ups and downs. Small corrections, in the order of 1.0%–1.5%, are followed by an excess of confidence, pushing the market higher. I must be humble and concede that the momentum seems hard to break. It’s about as hard as convincing someone who’s infatuated with someone to give up loving the object of their affection.
But, sooner or later, the tide will turn. It always does.
It was on September 3, 1929, about two months before the Great Crash, that economist Irving Fisher delivered a phrase that would live on in ridicule: “Stock prices have reached what looks like a permanently high plateau.” (Source: “The Worst Stock Tip in History,” Time, September 3, 2014.)
About six weeks later, Fisher probably wondered the wisdom of his thinking. Now, as the Dow has crossed the 22,000-point mark, everyone might benefit from empathizing with Fisher. How would you feel if you were Fisher during the week between October 24 and October 29, 1929 as the biggest stock market crash of the 20th century unfolded?
The level of exuberance, if not outright arrogance, of investors currently pumping their money into stocks with no regard for actual earnings is a spectacle to behold, similar to the tsunami waves produced by Hurricane Irma.
Perhaps it’s all a game of musical chairs, and the game—the bubble—will explode when the first big player falls on its behind.
What News Was so Good that It Pushed the Dow Over One Percent?
Here’s what the markets were apparently rejoicing over on September 11. The hurricanes that attacked Florida after wrecking half of the Caribbean were downgraded. Better, still, as far as stretching the boundaries of logic, the damage will be less than $65.0 billion, instead of the much higher figure that was projected earlier. (Source: “Hurricane Irma will hammer insurance industry — up to $65 billion in damage is projected,” CNBC, September 9, 2017.)
Well, isn’t that just special? Maybe, if you happen to be heavily invested in insurance companies, there’s some relief. But it’s hardly the kind of relief that warrants a major splurge on the financial markets, with champagne to follow. If the eventuality of a stock market crash was merely hanging on the amount of hurricane damage in Florida, how ‘solid’ could Wall Street’s rally really be?
No, what we are witnessing begs psychoanalytic expertise. Perhaps Sigmund Freud or Carl Jung might offer some interesting perspectives on what’s driving the markets up. Nevertheless, pioneers of capitalist philosophy, such as Adam Smith, would wonder what kind of mutation the invisible hand of the market experienced.
Markets Are Flying, But Americans Don’t Trust Trump (Supposedly). What’s Up with That?
Some might attribute the current bull market to President Donald Trump, but none of his proposed economic reforms have received adequate analysis in Congress, let alone pass. The next stock market crash will no doubt expose some deep political inconsistencies in Washington. But, it’s not trump’s fault. The partisan rivalry has not always worked to America’s benefit.
In addition, there must be an incredible hypocrisy factor operating in the U.S. today. President Trump’s effort in the White House affords him a 46% approval rating. (Source: “Trump’s Approval Rating Just Bounced Back from Worst In History For A President,” Newsweek, September 10, 2017.)
While investors apparently trust the markets, they mistrust the one person who can truly make decisions that could destroy the world. Either 54% of Americans secretly support Trump (they just don’t want their neighbors to find out), or financial games have become an exclusive pastime for the most enthusiastic of Trump supporters.
Yes, last week, the market was showing signs that there are still wise investors. The trigger for wisdom came from North Korea and its leader’s recent penchant for testing nuclear explosives and intercontinental missiles. That provoked a shift away from stocks to safe-haven commodities like gold and silver. Yet, all that’s changed from one bearish week to the next is that Kim Jong-un decided to postpone testing his country’s latest nuclear warhead.
That’s no reason to go out and buy stocks. You do that when you feel confident that the company whose stock you have purchased will share gains with you by producing that rare product that experts and amateurs like to call “earnings.” But, beware; momentum changes direction. It’s a trap for bullish investors. One day the markets are up; the next they shift sharply in the opposite direction.
Many investors are being too greedy. They fear missing out on the bigger returns next week or next month. But, it’s better to have a bird in the hand, as they say. From history’s perspective, the bullish bounce of momentum is simply taking investors to a higher precipice. The market crash will be all the bigger and louder.