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Five reasons why a stock crash threatens

By Benjamin Feingold und Egmond Haidt

Global stock markets are rushing from one record high to the next. At the same time, the risks are increasing. How does it fit together?

Trump gets nothing done: many investors still hope that US President Donald Trump will bring billions of dollars of tax reform to Congress by the end of the year, boosting the flagging economy. After Trump has failed terrificly with almost all his projects, it is dawning on some investors that Trump may not be able to enforce tax reform. This would further cloud economic prospects – bad news for the stock market.

Very high valuations: After years of money printing by the US Federal Reserve, the ECB and the Japanese Central Bank, the S & P 500, with a price-earnings ratio (P / E ratio) of 17.7, is rated as rare as ever. The long-term average was just 11 to 12 because that was the long-term earnings growth of the companies. The problem is that not only US equities but also securities from many other countries are expensive. Thus, the P / E ratio for the industrialized countries is a tad 16.5, which is not far below that of the S & P 500.

Risk China bubble: With worries many experts look to China. Although the economy grew by 6.9 percent year-on-year in the second quarter, it was slightly stronger than expected. However, the growth is mainly due to a huge debt dump, especially on the corporate side, while the valuation in the real estate market is growing. Should it come to a correction here, that would burden the economy enormously.

Investors are extremely reckless: the VIX, which reflects the volatility of the S & P 500, is below 10 points near its lowest level since the end of 1993. “This shows that investors are not currently pricing in major price swings on the US stock market,” says Sebastian Bleser, certificate expert at HypoVereinsbank Onemarkets. Frequently, investors in such an environment are hardly nervous and then do not anticipate any sharp price falls – the greater could be the price collapse. Dominik Storhas, derivatives specialist at Goldman Sachs, also sees product selection advantages in the S & P 500’s low volatility: “Historically low volatility makes put warrants comparatively inexpensive to hedge, and can offset price losses in the index.” Cautious investors can thus currently protect themselves against increasing price turbulence.

Yellen could shock the market: Yellen and her colleagues have repeatedly suggested why they want to raise interest rates further: because of the very high valuation of assets – especially in equities. Nevertheless, the S & P 500 is moving from one record to the next, because investors are betting on the weak economic data that Yellen will once again buck in the face of doubt and not raise interest rates as previously announced. To make it clear to the financial marketplace that Yellen is serious, she could surprisingly raise interest rates by 50 basis points at the session after next on September 20th. That would send a strong signal to the stock market and could weigh heavily on it.

At the moment, it looks like nothing could stop the party on the US and global stock markets. All the more many investors feel reminded of the years 1999 and 2007. Nobody can predict exactly if and when a crash will possibly occur. The more cautious investors should act on the market.