Discover the signs to look for that could indicate stock market trouble.
Is stock market trouble predictable? It seems there are a number of warning signs that indicate a market collapse.
Although it seems the stock market always seems to bounce back from political crises and keeps setting new records. But can it go on forever? A market bubble (economic bubble) can burst and cause prices to plummet.
How can you predict if there is about to be a downturn in the market? Take a look at the following five indicators that can be a warning.
1. Market Volatility – Both novice and experienced investors know that volatility in the market is a bad sign. You can recognize volatility when there are major swings in the Dow Jones Industrial average.
Wide price fluctuations and heavy trading are typical of a volatile market. It’s easy to become spooked and tempted to pull out of the market temporarily.
Markets do move up and down short-term, and market volatility is inevitable which makes it very hard to try and time the market.
Many investors choose to hold on to a long-term horizon and overlook short-term fluctuations as a way to weather volatility and stock market trouble.
2. Credit Tightening – Lenders watch the market closely and are the first to panic when there is any sign of stock market trouble. Those who lend to borrowers with average or below-average credit will pull back on their lending if they sense a possible market collapse.
Modest lines of credit, tightening up on loan requirements, a reduced credit limit, and shutting down underused credit card accounts are some of the ways lenders can free up billions in credit.
It’s an important means of obtaining security if and when there is another market crash. The United States economy runs on credit, and when credit expands the economy is growing. When credit declines it’s a sign of stock market trouble.
3. U.S. – China Trade War – The political tension between the two superpowers has been affecting the stock market as the tit-for-tat tariffs between them has the market up one day and down the next.
The assurance of upcoming October negotiations has calmed tensions temporarily, but there is no way of knowing if the trade talks will be successful. Expect stock market trouble if negotiations fail and the trade war worsens.
4. The Market is Overvalued – Buying low and selling high is the perfect end result when it comes to stocks, however, no one can tell you what the limit is to sell high.
You might think it’s a good thing when stock prices climb and climb, but it can be worrisome in the long run because it contributes to a market that’s overvalued and indicate a black cloud over the economic horizon.
Don’t forget the housing market bubble in 2007, when homes were overvalued. The bubble stretched until it popped.
5. Debt, Debt, Debt – Student debt is out of control with over 44 million people owing more than $1.5 trillion. Over 6 million are delinquent on their loans and health care costs keep rising.
In 1960, healthcare was 5% of the economy, and today it is 18%. Nothing is being done to rein in the costs and reduce the economic drag. The United States national debt is over $22 trillion That is larger than the whole economy, and it continues to grow.
The deficit is on track to exceed $1 trillion for 2019. When the government borrows heavily during a period of strong economic growth, and the deficit keeps expanding, it can lead to higher interest rates.
While no one can really predict when stock market trouble will occur, keeping your eyes out for the conditions in these five warning indicators can help you be aware and not get caught in a market collapse.
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