Investors are worried about the future of the US stock market. Although there is a somewhat bullish sentiment for the time being, there is a legitimate concern things may start to fall apart sooner or later. Although there is always a risk of the US stock market crashing one day, the bigger question is whether or not these concerns are justified.
Is A US Stock market Collapse Possible Or Not?
It would not be the first time the US stock market collapses, mind you. A similar incident occurred about nine years ago, during the 2007-08 financial crisis. During this last bubble burst, a lot of people and economies took a severe financial hit. If the US stock market were to crash in its current form, it is possible things will get ever worse as time progresses. No one looks forward to dealing with yet another recession, that much is certain.
To determine whether or not another collapse is imminent, one needs to look at the various facts. In 2016, the number of billionaires declined, albeit slightly. Moreover, their total combined net worth declined as well, by US$600bn. The last time both the number of billionaires and their total wealth declined was during the previous stock market collapse. Moreover, a similar trend occurred in 2002, after the dot-com bubble. It appears a similar trend as has been forming since 2016, although no one knows for sure if this will eventually lead to a collapse.
Furthermore, the US stock market is currently at a high. While this is positive in its own right, it may very well be a sign of another bubble waiting to burst at any moment. There are two sides to the US stock market, though. On the one hand, there is a group of active investors, who seem to be pulling their money out. On the other hand, there are passive investors – mainly consumers – who are flocking to equities, effectively funneling money in.
One could argue there is no reason for investors to exit the US stock market when things are going the way they are. The ratio of total market capitalization to GDP is reaching an alarming height. Right now, that rate sits at 132%, which is the second-highest since the 2000 tech bubble burst. To put this into simpler terms: the US stock market is severely overvalued and due for a significant correction sooner rather than later. This does not necessarily mean the market will crash soon, although it is impossible to tell if and when this may happen.
It is important to keep in mind the current US stock market valuation is subject to external factors as well. Granted, a lot of companies have gone up in value. However, there is also the emotional angle, which can quickly send the US stock market either way in a matter of hours. Plus, there is the trust factor. With more value to be distributed, trust becomes much harder to achieve. Investors are growing more cautious regarding their investments, which is only to be expected under the current climate.
In the end, there’s no way to predict the future. The US stock market may continue to carry on for years to come, or it may crash to the ground in less than a week from now. There is no way to tell what will happen for sure, albeit it is advised not to put all of one’s eggs in the same basket. Diversification of one’s portfolio is always the right move, which means solely relying on the US stock market may not be a favorable course of action as of right now.
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