3 Reasons Why a Stock Market Crash Could Be Likely
We have been talking about a possible stock market crash for a while in Lombardi Letter. Long-term readers have been warned several times.
Our reasons for these calls are very simple. Here are three of biggest ones:
- Stock valuations are too high. They tend to adjust over time and fall back to their historical averages. If valuations see a reversion-to-the-mean event, we could see a massive stock market crash.
- Stock markets are reliant on economic performance. The U.S. economy could be on the verge of losing its momentum. After the financial crisis, easy money gave the economy a boost, but that’s being taken away. With it, the U.S. economy could face headwinds and the stock markets could see sell-offs.
- Risks in the global economy are increasing. Everything on the surface may look good, but problems are brewing underneath. Global worries could cause a stock market crash.
Big Banks Turning Bearish on Stocks
Now the big investment houses are sounding the alarms of a stock market crash ahead as well. We are not surprised by this, but it’s very interesting, to say the least.
For instance, Morgan Stanley (NYSE:MS) came out with dire warnings recently.
Regarding the momentum in the market, the firm said in its notes to clients that there’s “a breakdown in both legs of momentum.” It warned that this phenomenon “could be a trigger for a significant market correction.” (Source: “Two stock-market ‘broken legs’ set stage for ‘significant’ correction: Morgan Stanley,” MarketWatch, August 9, 2018.)
Morgan Stanley talked about Apple Inc. (NASDAQ:AAPL) hitting the $1.0-trillion valuation. Rather than seeing it as a sign that says everything is great, Morgan Stanley said it “sure sounds like a ‘ringing of the bell’ to us.” (Source: Ibid.)
Bank of America Corp (NYSE:BAC), another notable financial giant in the U.S., came out with an outright bearish call to action recently.
Bank of America literally called for shorting the high-flying FAANG stocks—that’s Facebook, Inc. (NASDAQ:FB), Amazon.com, Inc. (NASDAQ:AMZN), Apple Inc., Netflix, Inc. (NASDAQ:NFLX), and Google parent company Alphabet Inc (NASDAQ:GOOG). (Source: “Short FAANG Stocks, BofA Says,” Bloomberg, July 28, 2018.)
While we are at it, know that Morgan Stanley and Bank of America aren’t the only big banks that have bearish calls on the stock market. Other major banks have done the same. The list keeps on getting bigger every day.
Why Do Big Banks Matter?
You see, institutional investors, those who actually have a lot of buying power and can move the markets, tend to listen to the big banks’ advice at times.
If the big banks are turning bearish and calling for a stock market crash of sorts, it could cause institutional investors to panic and sell. As a result, all of a sudden, we could have a major sell-off at hand.
Dear reader, my goal is not to scare you. All I am saying is, don’t get too complacent. Complacency is very dangerous. Don’t just look at the bullish case for the stock market.
After key stock indices soared immensely since their lows in 2009, the U.S. economy is facing headwinds, tensions in the global economy are rising, valuations are extremely high, and now the big banks’ sentiment is turning. It might be time to pause and reflect.
I believe that capital preservation is very important these days. It doesn’t hurt whatsoever in the good times and, in the case there’s a stock market crash, it protects investors.