Is the US Stock Market on the Verge of Crashing?

A lot of people will claim to be able to predict when markets will crash. But markets are full of chaos — “unknown unknowns” — and will burn the would-be prophets almost every single time.

What We Know

In the nearly 100 years of data we have, for example, the U.S. stock market has returned 10 percent per year on average, though it has rarely returned that in any individual year. Think of the markets’ force as a raging river. Any experienced rafting guide will tell you not to fight the rapids. You’re better off charting your course, adapting incrementally and not oversteering.

… [Nobel Prize winner Gene Fama along with researcher Ken French] published a paper studying the predictive value of the … inverted yield curve. They found no evidence that inverted yield curves predict stocks will underperform Treasury bills—again choosing scientific inquiry over conjecture.

… If you’re living in fear of the next downturn, consider shifting your thinking instead of your investments. Focus on controlling what you can control, such as how much you save, or finding the right stock/bond mix. As famous basketball coach John Wooden once said, “Don’t mistake activity for achievement.” Not doing anything is doing something—think of all those people who sold out of the market in 2008 and missed the last 11 great years for equities. __

Since the election of US President Donald Trump, the US economy has taken off. Perhaps coincidentally, US stock markets have also done well under Trump. Under socialist leadership things would not be going so well. But even under Obama, once the global recession eased off the US economy very slowly recovered — although nothing like what has happened under Trump.

Market Doomers Gotta Cry Wolf!

Here at Al Fin, we generally look at market doomers in the same way as we see climate doomers, peak oil doomers, and overpopulation doomers. The ones leading these doomer movements often have hidden motives — such as Al Gore’s successful quest to get filthy rich off his climate doom notoriety. Doom-followers tend to have nothing important to do with their time or their lives and drift from one unlikely belief to another without significant powers of logic or discrimination.

Basic investing is still done in the same, careful, methodical way it has always been done in a capitalist society. But be aware that if socialists are allowed to take over a society, corrupt insider rules of influence will take priority over everything else. Sweden once took that path and had to be bailed out by capitalism.

If there is one economy that gives reason for uneasiness, it is the global economy. China is a johnny come lately in the capitalist world, and is showing cracks at the seams. Too many nations around the world are overly dependent upon China markets for their exports. Things could turn ugly very quickly.

“The slowdown in China is becoming quite significant,” says Tommy Wu, senior Asia economist at Oxford Economics.

“Both the weakening in the domestic economy and deteriorating external environment, including both a global slowdown, and the US-China trade tensions, have a role to play in China’s slowdown.”

Given China’s importance in the global economy, and its healthy demand for anything from commodities to machinery, any downturn is likely to have far-reaching consequences. __

Xi may be forced to blink if this goes on.

Investment is down and Chinese employers are feeling the strain. This is not a prediction of doom for China, but any slowdown at all leads to profound unhappiness among the mainland Chinese people. Overseas Chinese are already very unhappy in Hong Kong — and increasingly wary in Taiwan. China has no friends, although it enjoys a parasitic relationship with Russia.

“The longer these tariffs remain in place, the longer this drags on, the higher the chance we are going to see more firms shifting out of China, and it also makes the country a less attractive place to invest in the first place,” he says.

While many firms will want to keep some production in China to cater for its important domestic market, there are signs some firms are already considering their options.

According to a 2019 survey by the American Chamber of Commerce in China, 65% of members said trade tensions are influencing their longer-term business strategies. Nearly a fourth of all respondents are delaying China investments, it said. __

When the mainland Chinese people get disgusted enough with the Communist Party, all bets are off. China has had a very turbulent century, and over the long haul Chinese empires tend to fall apart. Things could happen very quickly.

Thoughts on China’s Hong Kong Dilemma

China is willing to be patient and simply keep confronting the protestors until the protests fade. The alternative, using more force, is risky because it increases the probability of shutting down the Hong Kong economy. This would be a financial disaster for China, especially since the national economy continues to slow and the trade war with the United States remains unresolved. After decades of complacent and compliant American trade officials, the U.S. has finally cracked down on Chinese cheating and IP (Intellectual Property) theft. China would like to deal with the American demands more forcefully but China is vulnerable economically and diplomatically. The United States wasn’t the only victim of predatory Chinese trading practices but most nations will not risk economic retaliation from China. Yet these nations support the Americans because if the U.S. wins it means better terms for the many other victims of Chinese abuse. Hong Kong is a key element here because of its unique role as an access point to Western financial networks. China wants to eventually move those financial capabilities to other Chinese cities but that is not easy. Hong Kong earned the trust of Western financial institutions via decades of honest and productive relationships. Mainland Chinese financial institutions are not trustworthy to the rest of the world while Hong Kong is. Put another way, for China, Hong Kong to too valuable to lose. __

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