Can Anything Prevent a U.S. Stock Market Crash in 2016?

Is the U.S. stock market poised to crash in 2016? Absolutely. The writing has been on the wall for ages. It’s not as if anything has happened of late to point to a stock market crash, it’s just that the rest of the investing community is waking up to what we have been pointing out for years.

Stock Market Crash Getting Warmed Up

The stock market is supposed to be a barometer of how well the broader U.S. economy is doing. The stock market is a forward looking indicator. So, in theory, the stronger the stock market, the stronger the U.S. economy.

And by all accounts, the U.S. economy is doing great! Since bottoming in March 2009, the NASDAQ has soared more than 250% and the NYSE is up 130%, while the S&P 500 has gained 182% and the 30-company-strong Dow Jones Industrial Average is up more than 145%.

But that’s a little misleading. Those gains were fuelled by income-starved investors clutching at cheap money dangled in front of them by the Federal Reserve in the guise of multiple rounds of quantitative easing. This led to lower interest rates and the need for investors to pour more money into the stock market.

Seven years later, the stock market is still trending near record levels. This is in spite of years of underwhelming corporate earnings and revenue growth-or a lack thereof. Companies can only prop up their earnings by cutting costs for so long. And fickle investors can only prop up share prices for so long.

Eventually valuations have to be in sync. The only way that can happen is if investors wait patiently for that to happen. After seven years of easy gains, I doubt investors will wait in the pits. The other option? Investors will get scared and run for the exits, sending stocks reeling.

After years of being on fire, there are indications that this is starting to happen. Since the beginning of 2015, the once high-flying NASDAQ is down almost five percent; the NYSE has lost 11.5% of its value; the Dow Jones is down slightly more than 10%; and the S&P 500 is 8.5% in the red.

Interestingly, the 12-month average level of the S&P 500 has fallen for two straight months. That has only happened twice since 1995: ahead of the dot-com crash and the 2007-2009 bear market. 

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