Is It Possible To Learn The Warning Signs Of the Next Stock Market Crash?
Stock markets are generally expected to rise up in value in most years but an adjustment can happen when it is least expected and prices can plunge. Unfortunately, investors in the stock market cannot predict or avoid a stock market crash, which could be in the form of a periodic dip or an outright crash.
Investors in the stock market can only view some of the biggest stock market crashes from history for help to guide them through their investments. History could perhaps give investors an understanding of when a stock market crash may be on the cards and prevent them from incurring major losses.
Does Anyone Have Inkling About the Causes Of A Stock Market Crash?
Some research has been conducted into the common factors of stock market crashes. “The History Of the United States In Five Crashes” Authored by Scott Nations looked into the reasons why the major stock market crashes happened and found three common factors among them.
- The market was always overvalued.
- There was a kind of financial engineering which is also known as contraption.
- There was an external catalyst that was in most cases not related to the stock market.
How to Understand And Overvalued Stock Market?
Generally, a good indicator of the way the stock market is being evaluated can be estimated by looking at its price to earnings ratio, which also is the method used for evaluating individual stocks. Investors will get an estimate of the earnings of the company or the profits when they divide the aggregate price of the stock market by the earnings of the company because they will then be in a position to offer $1 towards the profit generated by the company. When the profit to earnings ratio is at its lowest the stock market remains undervalued.
Investors can get a clear indication of the value of the stock market when they examine the historical profit to earnings ratio and compare it to the current trends. An example of the average profit to earnings ratio which generally stands at 15.66 should be considered by investors with the current PE ratio of 24.71 which has been issued by S&P 500. The current ratings will give investors an indication that the market is overvalued by 58%. Stock markets have the potential to remain overvalued for quite some time before a correction can happen and therefore the profit to earnings ratio alone cannot be a prediction about whether a stock market crash is going to occur.
What Is A Contraption Or Financial Engineering?
It is easy to point at financial contraptions of the past than to predict culprits of the future. This was the problem of the.com crash which was facilitated by investors that were enthusiastic to purchase stocks related to technology. The stock market crash of 2008-2009 was in part because of wrong pricing of derivative securities of the mortgage market which is generally considered as a complicated product that is financially engineered.
In the book authored by Scott Nations, it has been pointed out that liquid ETF’s on the extreme kind would potentially pressure stock markets in the future. The equation for the stock market crash would be completed by an overvalued market and an external catalyst.
Anything Can Act As A Catalyst For A Stock Market Crash
In 2001 and after the 9/11 attacks, the stock markets were shut down for six days in an attempt to avoid a stock market crash. On the first trading day after the markets opened, investors were disappointed when the stock market lost 684 points or 7.1% of the value. This was the largest single-day loss in the stock market in its history.
A stock market crash can also be triggered by disasters which could be natural calamities as it happened in 1907 which was set off by the earthquake in San Francisco which was catastrophic in 1906. The war in Iran also impacted the stock market and caused the black Monday crash in 1987.
Can You Prepare Yourself To Avoid The Next Stock Market Crash?
Right now the stock market is highly overvalued and there are a significant number of investment products which are financially engineered in the marketplace. However, no investor has information about any catalyst that can lead to the next stock market crash. Even if investors had the information they wouldn’t be able to protect themselves from another stock market crash unless they decided to exit the market comprehensively.
The only option available to investors is to ensure they are fully capable of handling the situation when the stock market crash does occur. Investors have the option of making investments in real estate funds, bonds and even retaining cash with themselves because these are products which won’t diminish in value when the stock market crashes. Meanwhile, they can consider trimming back their holdings, especially since the stock markets are overvalued at the moment.
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