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After coming within points of an all-time high, stocks have begun to stumble, and volatility appears to be returning to the markets.This has led some market pros to declare that an amazing four-year rally in stocks is over and that we’re on the precipice of a new crash.
And there is certainly no shortage of logic to support that view.
Massive U.S. federal budget cuts are looming, political instability in Europe is returning, and currency values around the world are falling.
And by many measures, U.S. stocks look due for a comeuppance. Valuations are elevated, profit margins are at all-time highs, and there are signs of investor complacency everywhere.
Of course, not everyone thinks stocks are headed for a crash. In fact, some experts think we’re at the beginning of a new long-term bull market and that investors should go “all-in.” But we’ll focus on those folks later.
Much of the recent frenzy of stock buying has been boosted by borrowed money. Margin levels are rising fast.
Stocks are expensive relative to 10-year average earnings. This ratio, popularised by Robert Shiller, is above 22, which is much higher than the long-term average of 15.
US stocks specifically have been outpacing the rest of the world during the last three years. Such outperformance also tends to revert to the mean.
Based on the forward price-earnings ratio, the S&P 500 is one of the most expensive markets in the world.
And based on Robert Shiller's price-earnings ratio, the US has one of the most expensive stock markets in the world.
Investor sentiment by most measures is already extraordinarily high, which is often a warning sign. When everyone's bullish, it is often a sign that there's no one left to buy...
The volatility index, aka the 'fear index,' is near a historic low, which reflects investor complacency.
Gasoline prices have been rising rapidly. Stocks often sell off when gas hits these levels, because high gas prices tend to slow economic growth.
JP Morgan's Tom Lee has a reputation for being bullish no matter what. Last year, he was dead right about what stocks would do.
In his latest note -- titled 'Stepping Aside Short-Term; Fade Strength and Look for Better Entry Point Around 1400-1450; Big Picture Constructive' -- Lee thinks it's best to watch from the sidelines for now.
NYU economist Nouriel Roubini, who predicted the last financial crisis, has maintained an incredibly bearish stance on the economy for years, especially considering the Fed's ultra-easy monetary policy.
'The outcome of it could be a credit bubble that's bigger than the one we had in 2007,' he said recently to Yahoo's Aaron Task.
But in what may be the ultimate contrarian indicator, Roubini told Task that he was 'short-term bullish, long-term catastrophic.' He's short-term bullish in that he expects an ongoing, credit-fuelled asset bubble to continue to inflate.
The last two times stocks hit current levels, they collapsed. Now that they have recouped their losses, there are plenty of investors who would be happy to dump stocks and book profits.
So that's why a lot of experts think we're on the verge of a crash. Of course, lots of other experts disagree. We'll share their arguments soon. In the meantime...
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