Donald Trump Predicts U.S. Stock Market Crash
Will the stock market crash in 2017? It seems quite unlikely that the largest economy in the world will slip into a recession in 2017 and the U.S. stock market will crash. After all, the broader stock exchanges are—even after minor pullbacks—near record levels.
Since Donald Trump was officially sworn in as our 45th president, Wall Street and investors remain optimistic that his economic policies will ignite the economy.
While the unbridled optimism about a novice politician and soaring stock prices are certainly real, what’s supporting this sentiment is not. Stocks are overvalued, and the U.S. and global economies remain fragile.
This is not the foundation upon which you build further momentum on an aging bull market, which even Donald Trump said, during the first presidential debate, was “in a big fat ugly bubble.”
This wasn’t the first time President Trump questioned the health of U.S. stocks. In April 2016, Trump said he didn’t have much faith in the stock market outlook, and that it was a terrible time to invest because a huge recession was coming. (Source: “In a revealing interview, Trump predicts a ‘massive recession’ but intends to eliminate the national debt in 8 years,” The Washington Post, April 2, 2016.)
Stocks have soared a whole lot higher since those early warnings. Since Trump said he had lost faith in stocks and that a recession was coming, the major indices have extended their gains and remain near record territory.
Since April 2016, the Dow Jones Industrial Average (DJIA) has advanced 22.0%, the S&P 500 is up 20.1%, the NASDAQ is up 31.5%, and the NYSE is up 10.3%.
Since the first presidential debate on September 26, 2016, the DOW is up 8.6%, the S&P 500 is up 5.0%, the NASDAQ is up 5.2%, and the NYSE is up 16.5%. Most of those gains have come since Trump won the November election.
Suffice it to say, if Trump said stocks were in a bubble back in April and September, he’d say, if it were Presidential, that stocks were in an even bigger bubble now.
Keep in mind, Donald Trump sold off his entire $91.0-million-plus stock portfolio back in June 2016. Sure, some have said it was to avoid a conflict of interest. But recall, if you will, Trump has said on numerous occasions: “The law’s totally on my side, the president can’t have a conflict of interest.” And Trump’s right. From a legal standpoint, there can be no conflict of interest. (Source: “Trump shrugs off concerns: ‘The president can’t have a conflict of interest’,” CNBC, November 23, 2016.)
Still, one has to wonder if Donald Trump sold his stocks because he wanted to avoid the appearance of a conflict of interest, because his dislike for Wall Street is well known, or because he also believes that the markets are overvalued.
The same Wall Street analysts who failed to make stock market crash predictions before the stock market collapse in 2008 are ignoring the same warning signs today. The economy remains fragile, and the outlook for the stock market remains extremely volatile.
U.S. Stock Valuations in Nosebleed Territory: Where Is the Stock Market Headed?
Stock market crashes happen because stocks are in a bubble. Stock prices are higher than what the stocks are worth, and stocks eventually crash, bringing valuations more in line.
What leads to a stock market collapse? Ultimately, it’s panic. Whether it’s precipitated by an economic crisis, geopolitical event, or black swan event, investors panic and run for the exits. Judging by the stratospheric valuations these days, there are more than enough signs that point to a stock market crash in 2017.
How do we know stocks are overvalued? Because two of the most trusted stock market valuation ratios say they are.
First, the Case-Shiller cyclically adjusted price-to-earnings (CAPE) ratio suggests that the S&P 500 is overvalued by an eye-watering 87.5%. The 100-year average is around 16; as of this writing, the ratio is at 30.05. There are two ways to approach that number: 1) for every $1.00 of earnings a company makes, investors are happy to fork over $30.05, and 2) it will take more than 30 years for the earnings of the average stock on the S&P 500 to equal its share price. (Source: “Online Data Robert Shiller,” Yale University, last accessed July 26, 2017.)
The ratio, for which Robert Shiller won the Nobel Prize in Economics, has only been higher for longer twice: in 1929 and 1999. Before Black Tuesday in 1929, the CAPE ratio was at 32.56. In December 1999, at the height of the dotcom era, it topped out at a record 44.20.
Each time, it was followed by a stock market collapse, a stock market crash that Wall Street and the major news sources said would never happen.
This does not mean that U.S. stocks are going to crash in the coming weeks or even months. There is too much euphoria in the markets since Trump won the election. And the Case-Shiller ratio is not as dramatic as it was in 2000, when it stood near 45.
The last time the markets were this overvalued was in 1998, and stocks still climbed higher for another two years. That means stocks could continue to climb for another six months or more.
Regardless, according to Shiller, the stock market euphoria and irrationality will eventually hit a ceiling and could send stocks plummeting in a rerun of the 1929 stock market collapse. (Source: “Trump Setting Up Repeat Of ‘29 Market Crash,” The Huffington Post, January 19, 2017.)
The second stock market valuation ratio that points to an overvalued stock market is the market-cap-to-gross-domestic-product (GDP) ratio, also known as the “Warren Buffett Indicator.” In a 2001 interview, Buffett told Fortune magazine that the market-cap-to-GDP ratio “is probably the best single measure of where valuations stand at any given moment.” (Source: “Warren Buffett On The Stock Market,” Fortune, December 10, 2001.)
The market-cap-to-GDP ratio compares the total price of all publicly traded companies to GDP. A reading of 100% suggests that U.S. stocks are fairly valued. The higher the ratio is over 100%, the more overvalued the stocks are. The market-cap-to-GDP ratio is currently at 128.9%.
The Warren Buffett Indicator has only been higher twice since 1950. In 1999 (again), the ratio was at 153.6%. In late 2015, it was at 129.7%. It was only at 108% before the 2008 financial crisis.
Record Stock Levels a Result of Financial Engineering
The major indices are near record highs, but not because investors are excited about strong corporate earnings and revenue growth. Stock valuations are at dangerous levels because of years of artificially low interest rates and financial engineering.
Artificially low interest rates were supposed to make it cheap to borrow money. The only thing we know for certain is that artificially low interest rates gutted retirement portfolios that relied on fixed income investments like bonds, CDs, and Treasuries. Income-starved investors and retirees were forced to put their money in risky investments like the stock market.
As for financial engineering, companies propped up their corporate earnings by announcing severe cost-cutting measures and record share buyback programs. In fact, buyback programs helped propel the S&P 500 into record territory at a time when corporate earnings were contracting. The S&P only recently ended its longest earnings recession on record, but you’d never know that Wall Street was even in one if you looked at the major stock indices.
Between 2010 and 2016, U.S. companies repurchased nearly $3.0 trillion of their own shares and spent almost $2.0 trillion on dividend payments.
But you can only rely on this trick for so long. Eventually, investors will want to know that earnings per share (EPS) growth is coming from increased earnings, not financial engineering.
After stock repurchases hit a record level in 2015, they slowed in the June–September period of 2016. But stock repurchases spiked after the U.S. election. Wall Street expects that Trump’s promised tax cuts will put more money back into company coffers. (Source: “Surging Buybacks Say Stock Boom Isn’t Over,” The Wall Street Journal, December 26, 2016.)
Mind you, Trump is having trouble getting his tax cuts enacted. And corporate America is taking notice. This is putting water on the fuel that has been helping prop up U.S. stocks. Share buybacks were down 17.5% year-on-year in the first quarter of 2017 at $133.1 billion, even as the S&P 500 marched to record highs. (Source: “Buyback outlook darkens for US stocks,” Financial Times, June 21, 2017.)
The fact is, U.S. companies have been the single biggest buyers of shares in the post-recovery period. And the outlook for the rest of 2017 is looking worse. Boardroom approvals for new share repurchase programs have fallen to their lowest levels since 2010.
One of the biggest pillars supporting the third-most overvalued stock market in history is quietly being removed.
Moreover, Trump has said he wants to introduce a tax holiday, one that would see Wall Street bring some of the $2.6 trillion in corporate overseas profits back to the U.S., where it would be subject to more favorable U.S. taxes.
Companies are supposed to use the influx of cash for development and hiring. But history has shown us that repatriated money from tax holidays tends to go to dividends and share repurchase programs, both of which have the added effect of inflating stock valuations even higher, and stretching the stock market bubble even thinner. That is a bubble that President Trump has said is already fat and ugly.
U.S. Employment Not as Solid as You Think
Does the U.S. and global economy suggest the markets are going to crash in 2017? Remember, the stock market outlook is only as strong as the underlying stocks, and those stocks are only as strong as the economies that need them. By all accounts, the U.S. and global economies are not as strong as we’re being led to believe.
In June, the U.S. unemployment rate ticked up slightly to 4.4%, with the U.S. economy adding 222,000 jobs. One of the reasons why the U.S. continues to report decent jobs data is that the labor force participation rate remains near historic lows. A record 95.10 million Americans left the labor force in December, up from the November 2016 record of 95.08 million. In June 2017, the number of Americans not in the workforce was 93.2 million. (Source: “Employment Situation Summary,” Bureau of Labor Statistics, July 7, 2017.)
Moreover, the participation rate in July was at 63.2%, a little shy of the October 2015 all-time low of 62.4%.
Not everyone is happy with where they’re at. Roughly 5.3 million Americans work part time but want to work full time. The pre-recession level was 4.4 million. Many Americans, it seems, are not even aware the U.S. is in a recovery.
Add it up, and the underemployment rate is 8.6%.
Unfortunately, a lot of unemployed Americans aren’t included in that number. In June, a whopping 1.6 million Americans were not counted as unemployed even though they were out of work because they had not searched for work in the four weeks preceding the survey.
The U.S. is faced with a lack of decent, well-paying, secure jobs; glacial wage growth; and increasing household debt levels.
This comes at a time when the average American has depleted their savings. Almost a quarter of Americans (24%) have no emergency fund, 49% of Americans are living paycheck to paycheck, and 46% would have to borrow money if they had an emergency expense of $500.00.
With the Fed raising its key lending rate, twice so far in 2017, it’s going to be a lot harder for the average American to make ends meet, and to help carry the U.S. economy. Keep in mind, the U.S. gets more than 70% of its GDP from consumer spending.
This will weigh heavily on corporate America.
U.S. Economy Remains Fragile
While U.S. unemployment remains low at 4.4% and many employers are saying they’re finding it difficult to fill positions, the fact is, the U.S. economy remains as fragile now as it was during the Obama administration.
The current U.S. economic recovery began in 2009. But many Americans are suspect of the so-called “recovery”…especially if steady jobs and wage growth is important. Unfortunately, the U.S. economy is advancing at its slowest pace since World War Two.
During Obama’s two terms in the Washington, annual GDP growth averaged a paltry two percent. In the 10 previous expansions, GDP advanced, on average, 4.3%. In 2016, Obama’s last year in office, U.S. GDP was a princely 1.6%.
Not surprisingly, Obama’s economic lethargy has carried over into 2017. In the first quarter, U.S. GDP increased at a 0.7% annual rate, the weakest pace in three years. And the second quarter doesn’t look any better.
The New York Fed has revised its second-quarter GDP outlook downward on the heels of weak economic data. It now sees second-quarter GDP coming in at 1.9%. While still solid, it’s a far cry from the lofty 2.6% projections announced in April.
The Atlanta Fed is also a little less optimistic about the U.S. economy. It has lowered its guidance for the second quarter to 2.5% from 4.3% in May.
What does this show us? You can rely on the Federal Reserve to be consistently optimistic about the U.S. economy at the beginning of the quarter. But, as the weak economic data rolls in, the Fed’s optimism wanes.
Weak GDP numbers will also eventually put a lid on investor euphoria. Stocks continue to enjoy the Trump Bump and trade in record territory, but this can only be sustained if corporate America churns out strong revenue and earnings growth. This can only happen if President Trump can boost annual U.S. GDP to three percent, which is what he promised to do on the campaign trail. If this fails to materialize, that euphoria will turn to despair and investors will run for the exits.
Global Economy Remains Weak: When Will the Next Stock Market Crash Happen?
The global economic outlook also remains muted. With almost half of all S&P 500 companies relying on foreign sales, it looks like U.S. companies will no longer be able to rely on exports to help prop up revenue and earnings.
Economic conditions in China, the world’s second-biggest economy; Europe, the world’s biggest economic region; and Japan, the third-largest economy in the world, are all underperforming.
In 2016, China’s economy expanded 6.7%, the slowest in 26 years. Japan’s economy remains staid, and uncertainty around Brexit and other issues could weigh down Europe’s barely-there growth even more.
Prepping for a Stock Market Crash in 2017
The U.S. and global economies remain weak, and U.S. stocks are significantly overvalued. The current bull market may be the second-longest in history, but that doesn’t mean the momentum is going to continue. And it certainly doesn’t mean that Wall Street knows what the stock market outlook is.
A U.S. stock market crash is coming, but there is still time for investors to take advantage of market opportunities. In anticipation of the well-deserved downtrend, correction, and crash, investors can hold physical gold, gold mining shares, or gold (mining, physical) exchange-traded funds (ETFs).
A stock market collapse also means it could be a good time to buy. As Warren Buffett, one of the world’s greatest investors has said, “be greedy when others are fearful and fearful when others are greedy.”
Market crashes are a great time to pick up amazing companies’ stocks at bargain prices.