Despite a global pandemic and historic volatility over the past year, investors have a lot to be thankful for.
After losing 34% of its value in less than five weeks during the first quarter of 2020, the benchmark S&P 500 (SNPINDEX:^GSPC) bounced more than 75% higher from the bear market low set on March 23. In no particular order, investors have been encouraged by:
- The Federal Reserve’s willingness to undertake unlimited quantitative easing measures to buoy financial markets, as well as its historically dovish stance on lending rates;
- The federal government’s more than $3 trillion in fiscal stimulus passed in 2020; and,
- The expediency with which several coronavirus disease 2019 (COVID-19) vaccines were developed and introduced in the United States.
Unfortunately, the stock market’s incredible 11-month bull run may come to a crashing halt. Although it’s impossible to predict stock market crashes and corrections with any true precision, there are more than enough clues to suggest that trouble is brewing. Over the next three months, three catalysts stand out as particularly concerning, and more than capable of causing a crash.
1. Valuations are at nearly two-decade highs
Arguably the single greatest concern for the stock market is valuation, which is something I’ve been harping on for months.
As of Feb. 22, the Shiller S&P 500 price-to-earnings (P/E) ratio — a P/E ratio based on average inflation-adjusted earnings from the previous 10 years — stood at 35.30. That’s more than double its average reading of 16.78 over the past 150 years, and it’s the highest the Shiller P/E ratio has been for the S&P 500 since the dot-com crash two decades ago.
There have only been five instances in the 150-year history of the Shiller S&P 500 P/E ratio where a bull market rally has sustainably taken it above 30: The Great Depression, the dot-com bubble, Q4 2018, the COVID-19 crash of Q1 2020, and currently. In each of the previous four instances, the S&P 500 lost between 20% and 89% of its value. Admittedly, the Great Depression was a unique scenario that would be unlikely to play out today. Nevertheless, bad things have historically been in the cards for the S&P 500 when the Shiller P/E ratio gets north of 30.
2. COVID-19 variants/vaccination holdouts are concerning
Secondly, it wouldn’t be smart to overlook COVID-19 as an ongoing concern.
Much of the news we’ve received on the coronavirus front has been good. Two vaccines have been granted emergency-use authorization in the U.S., with a handful of other drug developers reporting positive late-stage results from their vaccine studies. As of Feb. 22, more than 63 million doses had been administered, with nearly 6% of the adult population receiving the two-dose inoculation. The U.S. is currently administering around 1.8 million vaccines each day.
The problem is that the virus continues to mutate, with…
Go to the news source: 3 Reasons the Stock Market Could Crash in the Next 3 Months