Friday, February 6, 2015

Will the Market Crash in 2015?

Right now the U.S. stock markets are trading at record highs. This is the very reason so many analysts and investors are bullish about the stock market. With the stock market doing so well, why would anyone think a stock market crash could take place in 2015?

Let me first say this. I don't believe the market will crash in 2015. However, I also know the stock market is very volatile and things could change at any given moment. While the S&P 500 has climbed over 200% since 2009, it could just as easily start going the other direction.

Keep in mind the stock market is only as strong as the companies within them. Right now, on the surface, every thing looks great. The U.S economy is improving, unemployment is going down and consumer spending is on the rise. Here's the thing though. Yes, more and more consumers are spending. The problem however is they aren't using cash. That means debt levels are also on the rise.

One of the biggest things that can lead to a potential stock market crash in 2015 is the fact the stock market euphoria will eventually fade. Right now everything is good so investors are happy to invest. However, more and more investors are starting to realize just how risky the stock market is and can be. That means euphoric irrationality will no longer be a key driver in the stock markets. Investors will start to think twice before investing.

Another indicator of a potential market crash in 2015 is weak global growth projections. The stock market crashed back in 2008. Since then growth in the U.S. economy has been very inconsistent. In 2013 U.S. GDP growth was a very low 1.9%. In 2014 it wasn't much better coming in at just 2.2%.

The International Monetary Fund predicts in 2015 the U.S. economy will grow by 3.1%. The IMF previously estimated a 4% growth rate but quickly changed it. This is because they believe there is a 38% chance the eurozone will fall back into recession during the first part of 2015.

There are also issues in Japan, China and Russia as far as economic expansion goes. Here is something you might not be aware of. Close to 50% of the public companies traded on the S&P 500 get the bulk of their sales from Europe. So yes, the outlook for the U.S. stock market is pretty good. The problem however is not all stocks will perform well.

Here's the message I want you as an investor to understand. America is limited in its ability to carry the global economy all by itself. Despite what you are hearing from Wall Street, the truth is the market is overvalued. When compared to their 10 year average, stocks are priced much higher than they usually are. History shows us that stocks usually have a price to earning ratio of 15.

Right now that ratio is at 26.51. In other words, stocks are currently priced 76% higher than their 10 year average. That alone should tell you a lot about what's going on in the stock market. Again, I don't believe the stock market will crash in 2015. But if it does happen, I wouldn't be surprised.

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