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Stock Market Crash Ahead? Americans' Stock Holdings Hit 70-Year Highs Lombardi Letter 2021-05-17 06:16:04 stock market crash stock market stocks We could be on the cusp of a stock market crash. Each day, the odds of a sizeable sell-off keep getting bigger. Investors beware! 2021 may not be as great as 2020. Stock Market Crash https://www.lombardiletter.com/wp-content/uploads/2021/05/stock-market-crash-economy-crisis-hand-drawn-graph-on-chalkboard_t20_vLkyAO-150x150.jpg

Stock Market Crash Ahead? Americans’ Stock Holdings Hit 70-Year Highs

stock market crash

Stock Market Crash Happens When Everyone Goes In

When there’s a rush to buy stocks, it might be time to get skeptical. A stock market crash happens when everyone goes in, not when everyone is scared to invest.

Right now, there’s a lot of evidence suggesting there’s a rush to buy stocks and that we could be getting to the moment when investors are “all in.” Beware: a severe stock market crash could be upon us sooner rather than later.

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Consider this: according to JPMorgan Chase & Co. (NYSE:JPM) and Federal Reserve data going back to 1952, Americans are currently holding more stocks in their portfolios—be it retirement or other accounts—than ever before. It’s the highest stock holdings in about seven decades!

As of April, Americans’ stock holdings stood at 41% of their total financial assets. (Source: “Americans Can’t Get Enough of the Stock Market,” The Wall Street Journal, May 2, 2021.)

But don’t for a second think that’s the only reason to be skeptical about the stock market.

Investors Are Taking on Leverage; Sentiment Remains Euphoric

Pay attention to margin debt as well. What is margin debt? Think of it as investors borrowing money to buy stocks. It’s leverage.

Over the past year, investors have really been addicted to borrowing money to buy stocks. In March 2020, margin debt stood at $479.3 billion. In March 2021, margin debt stood at $822.6 billion. That means, over the past year, margin debt has increased by 71%! (Source: “Margin Statistics,” FINRA, last accessed May 14, 2021.)

Leverage is a double-edged sword. When things are good, it amplifies gains. However, when market conditions aren’t good, the losses get large very quickly. At the moment, investors are buying on leverage almost as if they’re doubling down on their bets in the stock market. It shows they’re euphoric.

If you dig deeper, you’ll find more evidence of potential problems.

Look at investor sentiment indicators: you’ll find that investors are extremely bullish and are willing to buy more. Consider the American Association of Individual Investors’ Investor Sentiment Survey. Not too long ago, nearly 80% of individual investors were either bullish or neutral on the stock market. (Source: “AAII Investor Sentiment Survey,” American Association of Individual Investors, last accessed May 14, 2021.)

Also look at inflows at stock market exchange-traded funds (ETFs): we’re seeing massive figures there. According to data compiled by Bloomberg, in a little less than four months in 2021, investors poured $246.0 billion into U.S. stock ETFs. Here’s the kicker: this is higher than what they put into U.S. stock ETFs in all of 2020. (Source: “A $246 Billion Bonanza Means Stock ETF Inflows Already Beat 2020,” Bloomberg, April 28, 2021.)

Outlook for Rest of 2021: Stock Market Crash Could Be Just Around the Corner

Dear reader, the list of indicators suggesting that investors could be going all-in continues to grow. Don’t just listen to me; do your own due diligence and your findings will be very similar.

While the mainstream media may have you convinced that everything is great with the economy and you don’t need to worry, the odds of a stock market crash are increasing. I can’t stress this enough: 2021 may not be anything like 2020. Expect tons of volatility and wild swings in stock prices.

As such, it may not be a bad idea to focus on capital preservation. This includes placing stops on positions, considering cutting losses, and even taking some profits off the table just in case a stock market crash follows. Cash in hand could be useful when there’s a sale on in the market.

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