Markets are Looking Toppy...
Today I'm delighted to share the latest video from our YouTube channel with you. This week we look at the increasing likelihood of an impending stock market crash.
There is a great deal in the mainstream press and all over social media at the moment suggesting that the stock market is in a bubble – and that the current AI and tech boom makes the investing world look a great deal like it did before the dotcom crash.
Warren Buffett is sitting on a record cash pile of nearly $350 billion, and the indicator named after him – which compares the value of the stock market to the value of the US economy – is now even higher than it was ahead of both the dotcom crash and Global Financial Crisis.
There are lots of clever charts flying around showing that the current run in shares looks eerily similar to what things looked like ahead of those last two crashes. Something called the Schiller CAPE ratio (or Cyclically Adjusted Price-to-Earnings ratio) is now above 40 – something that has been very rare in history and suggests American shares are very over-valued.
As I explain in the video, there are a number of factors driving these stock market highs, notably the inexorable rise of passive investing - which gives almost no consideration to valuations at a fundamental level. Plus the impact of momentum-driven algorithmic trading strategies.
Taken together, passive and algorithmic trading account for the significant majority of all trades on the US stock market nowadays, so these have been really important themes underpinning the increase in the level of American shares over the last several years.
Crucially, these themes haven’t been anywhere near as powerful, or haven’t even existed in the past in many cases, so any indicator that compares now to then may be a great deal less effective than it may have been historically.
And this means that all bets could be off in terms of just how far this theme may have to run – and there could be even more upside before the top finally blows!
This all having been said – if a number of these things go into reverse, as they almost certainly will at some point, the crash this time could be as turbo-charged as the rise has been, and really properly awful as a result.
...but it needn't matter:
Most important of all, however, and the purpose of the video, is that I wanted to say again that, within reason, you can make it so that none of this stuff need matter to your long-run ability to build wealth. None of these considerations need impact how you invest big-picture.
It is really important to be wary of the possibility of a massive financial market crash. But, in the main, so you can ensure that you are confident in your long-run investment plan and continue to do the right thing, all the way through any crash and beyond.
There is lots more detail in the video.
As ever, we hope you find it useful and vaguely interesting. Please do share it if you think someone else might benefit from watching it!