Stock Market Crash: 3 Factors Say Big Declines Ahead for Stocks in 2017 Lombardi Letter 2017-01-03 10:01:08 stock market crashstocksS&P 500stock market outlook There are three factors that suggest a stock market crash could occur in 2017 and send key stock indices like the S&P 500 30% down. Here’s the full story. Stock Market https://www.lombardiletter.com/wp-content/uploads/2016/12/Stock-Market-Crash-1-150x150.jpg

Stock Market Crash: 3 Factors Say Big Declines Ahead for Stocks in 2017

These Three Factors Suggest Stock Market Crash Could Be Ahead

In 2017, a stock market crash is a real possibility. Stock investors need to look at the underlying fundamentals.

There are three things investors should be paying attention to; stock market valuations, investors’ pessimism, and opportunities elsewhere. They are screaming a stock market crash could be ahead.

1. Valuations

No matter how you look at it, valuations on the equities are foretelling a stock market crash.

Consider the S&P 500 CAPE ratio, a price-to-earnings ratio adjusted for cycles and inflation. It currently stands at 28.26. (Source: “Online Data Robert Shiller,” Yale University, last accessed December 29, 2016.)

Last time this S&P ratio was this high, we were in the midst of a tech bubble, in May of 2002.

How overvalued is the S&P 500? The long-term average CAPE ratio since 1880 is 16.71. If we compare the current CAPE ratio to historical average, it says the S&P 500 is overvalued by roughly 70%. Scary.

2. Investor Pessimism Towards Stocks

A stock market crash occurs when investors are bearish on stocks. We see this happening. Investors are trying to get out quick.

Consider this; according to the Investment Company Institute (ICI), in the first three weeks of December, long-term U.S. stock mutual funds witnessed outflows of over $18.0 billion. (Source: “Estimated Long-Term Mutual Fund Flows December 28, 2016,” Investment Company Institute, December 28, 2016.)

The monthly figures for the month of November and December aren’t available yet, but for the first 10 months of 2016, U.S. long-term stock mutual funds witnessed outflows of close to $200.0 billion. In the same period a year ago, the outflows were less than $20.0 billion. (Source: “Summary: Estimated Long-Term Mutual Fund Flows Data,” Investment Company Institute, last accessed December 30, 2016.) In other words, year-over-year outflows from long-term mutual funds have increased 900%.

3. Other Opportunities Are in the Making

You see, after the stock market crash of 2008 and 2009, one of the biggest reasons investors ran towards stocks was low interest rates and lack of opportunities elsewhere.

But this isn’t the case anymore. The interest rates set by the Federal Reserve are on their way higher. This is suddenly making fixed income security look much better than it was before.

For instance, consider the yields on 30-year U.S. bonds, currently standing at 3.09%. Please look at the chart below:

Stock market crash - 30-year bonds yields

Chart courtesy of StockCharts.com

The yields on 30-year bonds today are roughly 45% better than they were in July of 2016.

Looking at this, one must question if those funds and investors who jumped in stocks because they couldn’t find attractive yields will rush to bonds.

This phenomenon could cause a stock market crash.

Stock Market Outlook for 2017: Grim Outlook Ahead

Looking at the fundamentals, a stock market crash looks like a more likely scenario in 2017 than a stock market rally.

Understand that if a stock market crash does occur, the losses are going to be quick and rigorous.

How low could the stock market go? Take the S&P 500, for example; the next biggest support level isn’t until 30% below. A broad market sell-off could take it there. Obviously, with time we will know more.

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