A decade on from the start of the greatest economic depression of modern times, investors are growing increasingly worried that stock markets are heading in a similar direction today.
Many financial observers pinpoint the beginning of the recent global depression to August 2007, following the failure of two Bear Stearns hedge funds and a sharp fall in Lehman Brothers stock that effectively locked in the bank’s inevitable meltdown a year later. A groundswell of concern has been building that the US stock market is now in dangerously high territory, as the Nasdaq, the Dow Jones and S&P 500 continue to post record highs, with the value of the market almost 150% higher than the nation’s GDP. That’s a level previously seen before the dot-com bust from 2001.
According to a recent Bank of America Merrill Lynch survey of global funds, a net 19% of global asset allocators were underweight in US equities, the biggest since January 2008.
The relentless rise in share prices has unsettled certain well-known investors, including Jim Rogers, who founded the Quantum Fund with George Soros. He has predicted that “a $68tn collapse of Biblical proportions is poised to wipe out millions of Americans”.
Swiss investor Marc Faber, editor of the Gloom, Boom & Doom Report, predicts stocks will plunge by over 40%. “We have a bubble in everything, and investors are on the Titanic with stocks about to endure a gut-wrenching drop that would rival the greatest crashes in stock market history,” he forecasts.
Economist Andrew Smithers, founder of advisory firm Smithers & Co and author of the 2000 tome, Valuing Wall Street, which predicted the crash, says: “US stocks are now about 80% overvalued.”
His argument is backed with a ratio showing that the only time in history stocks were this risky was in 1929 and 1999 — both prior to falls of 89% and 50%. This gloomy outlook is further underlined by veteran investor John Hussman who predicts the stock market may plunge 60%. He describes the current financial environment as “the most broadly overvalued moment in market history”.
Knowledge is power for the investor, and especially when hard decisions need to be made.
“If you look at the market historically, we have had, on average, a crash about every eight to ten years, with the average loss about 42%,” says Kendrick Wakeman, CEO of financial technology and investment analytics firm FinMason. “One of the problems encountered in 2008 was that many people who were close to retirement also had lots of equity risk but didn’t know about it.”
Citing research showing that almost 60% of investors do not fully understand the term ‘risk tolerance’, he poses the question: “Advisors need to ask their clients, ‘Would you hang yourself in the closet if the market crashed and you lost 35%?’”
Against the clamour of gloom, a letter to Berkshire Hathaway shareholders earlier this year by the legendary ‘Sage of Omaha’, Warren Buffett, pointed out that the Dow Jones Industrial Average gained 72% from the end of the 20th century through the end of 2016.
“American business, and consequently a basket of stocks, is virtually certain to be worth far more in the years ahead.”
As to the voices predicting an imminent crash, he says: “Heaven help them if they act on the nonsense they peddle.”
A seasoned exponent of the dictum ‘be greedy when others are fearful’, Mr Buffett invested $5bn (€4.25bn) in Goldman Sachs at the height of the recent financial crisis, making a total return of 62% over five years.
In these uncharted financial waters, perhaps the investor of 2017 might do well to bear in mind the words of American humourist Will Rogers on stock market investing: “I’m not so much concerned about the return on my money, but the return of my money.”