It’s been a bumper year for financial markets. But as a new decade moves swiftly into view, analysts are becoming understandably nervous about a potential stock market crash. The S&P 500 is up nearly 30 percent since the beginning of the year, and the Dow Jones has gained a shocking 20 percent over the past 12 months. 2019 is about to become the US stock market’s best year since 1997. But nothing lasts forever, and this decade-long bull market is almost certainly heading for a crash landing.
According to Guggenheim Partners’ Chief Investment Officer Scott Minerd, the end of this glorious bull market is getting dangerously close. He says the Fed’s easy-money policies over the past year have helped pump markets full of liquidity. This has created an environment comparable to that of 1998, when a 45-day correction shaved nearly 20% off the S&P 500.
Minerd said the Fed’s policy has helped extend economic expansion but that a downturn is almost inevitable. The conditions in today’s market are eerily similar to 1998— inflated valuations, rising share prices, and speculative investors with an unhealthy appetite for risk. All of that is against a backdrop of low unemployment and increasing business confidence fueled by central banks’ quantitative easing.
Minerd isn’t the only one sounding alarm bells. Nobel Prize-winning economist Robert Shiller also warned that there were “bubbles everywhere” earlier this year.
Predicting the timing of the correction is more difficult. Minerd believes the spread between high-yield debt and safer options is one sign that a crash is coming. The fact that investors are increasingly willing to accept a higher degree of risk for a relatively low yield is a red flag, Minerd cautioned.
Joe Davis, head of investment strategy at Vanguard, says he sees a 50% chance of a market crash in 2020. While that’s markedly higher than the majority of his peers, Davis says there are too many factors threatening to pop the stock market bubble in the year ahead. Chief among them, he says, is the trade tension with China.
In the year ahead, we don’t foresee a significant reversal of the [U.S.-China] trade tensions that have occurred so far. And with continued geopolitical uncertainty and unpredictable policy-making becoming the new normal, we expect that these influences will weigh negatively on demand in 2020 and on supply in the long run.
Moody’s Chief Economist Mark Zandi identified 16 different factors threatening to disturb the global economy in 2020. On top of the global trade war worries, Zandi pointed to central bank policy errors, a no-deal Brexit, and another European debt crisis as factors that are likely to chip away at the economy in the year ahead.
Of course, not everyone is forecasting doom and gloom for 2020. Historical data shows that the S&P 500 usually finishes higher after turning in gains of 25% or more in a single year. Analysts at some of the largest financial institutions says things look calm in the year ahead. Still, despite optimistic projections for 2020, most recommended defensive investment strategies and noted that being at the end of an expansion period adds a layer of risk.
Last modified: January 30, 2020 9:01 PM UTC