Stock Market Crash Probability – Financial Advice
Seeking Alpha Analyst Since 2019
Ujae Kang, CAIA, CFA, ASA, MAAA
Ujae Kang is the portfolio manager and chief compliance officer.
He has been managing clients' investment portfolios over 10 years. He is an Associate of the Society of Actuaries, a Member of American Academy of Actuaries, a charter holder of CFA and CAIA. He holds a Bachelors of Business Administration from Indiana University Bloomington. He holds a Master of Financial Mathematics from the University of Minnesota's School of Mathematics.
He is a board member of Thursday Musical and a board member of Korean American Association of Minnesota.
Summary
- The Democrat party now has power to implement its own fiscal policies.
- Most likely, more economic stimulation from the government and the Federal Reserve.
- In fact, it is very possible that the stock market may climb higher for the next several months fueled by cash injections from the government and the Fed. However, from.
Generally speaking, taller men and women frequently have the advantage in sports. Pitchers with longer arms, boxers with a longer reach, swimmers with longer arms, basketball, volleyball, etc... That statement has a condition: “within reason”. Unnaturally tall people (> 7 ft) have many physical ailments and end up having much shorter life spans than average, which makes them less fit for competitive sports.
Generally speaking, a climbing stock market is good for the economy. That statement also has a condition: “within reason.” An unnaturally soaring stock market is a reflection of manipulation, increasing future risk and wasteful use of natural resources (including time and labor that underpin a nation’s production).
With the political landscape picture becoming clearer going into 2021, it appears that two things are likely to happen. The Democrat party now has power to implement its own fiscal policies. Most likely, more economic stimulation from the government and the Federal Reserve. Unlike the Republican party, the Democratic party has little to no resistance within the party to expanding government programs and providing monetary stimulus for the economy. This means that stocks may push higher due to inflationary forces as the value of money declines steadily.
When government (fiscal) and the Federal Reserve (monetary) stimulations flood the country with cash AND there are not enough great investment opportunities to put the cash into, it quickly flows into the easiest place to park money, the stock market. This makes the bubble grow even bigger.
The feeling out there right now is optimism. Think about this though, about 1 year prior to the Great Depression of 1930, automobile makers are setting new financial records much like Tesla, Google, Amazon, and Facebook these days.
Below is the Shiller PE ratio. It is one of the most respected ratios to gauge the status of the stock market and measures average stock prices relative to the average net income of the US’s largest 500 companies. You can see we are entering into a more inflated zone than the Great Depression, but not quite to the level of the tech stock burst in 2000.
Some investors or financiers justify such sky-high valuation of stocks stating that the discount rate, i.e. interest rate, is at a historical low and the earnings stability is higher due to more sophisticated accounting rules. In other words, there is always a reason to justify the hope that we are not at the top of the bubble yet. Even very sophisticated investors are starting believe that. But remember, right before the Great Depression of the 1930s, the major credit rating agency (supposedly the smartest people in the market) stated, “The prosperity which has characterized this country with only moderate setbacks since 1923 is likely to continue without great variation well into the future, according to John Moody, president of Moody’s Investors Service.” (New York Times January 4th, 1929).* This shows the difficulties of predicting when a crash will occur, let alone even noticing one.
The above chart shows the short term-based PE ratio, a variation of the Shiller PE ratio. It shows a rapid bubble formation is happening right now that matches the recent stock market crashes of 2000 and 2008.
In fact, it is very possible that the stock market may climb higher for the next several months fueled by cash injections from the government and the Fed. However, from a prudent trade off perspective, it is going to require taking on too much risk to try to cash in with this short-term outlook.
Consider me the unpopular ski patrol who tells young “GoPro” kind of skiers not to go up on the peak of the mountain right after a big blizzard. It won’t be a popular advice until after an avalanche happens.
Looking 1~4 years ahead, the unconstrained money printing will lead to inflationary pressure along with a declining dollar value. This anticipation leads me to tweak existing investment portfolios to have a bit more position in high-quality foreign bonds, commodities, and carefully selected real estate investment trusts in lieu of long-term bonds. More to come.
Sarah & Ujae Kang,
Founders of UAK Diversified Wealth Management
*New York Times quotes at the courtesy of Ray Dalio’s Big Debt Crises by Bridgewater.
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