"Is The Stock Market Near a Crash?"

An interesting  article was written by Glen J. Buco, CFP, of West Financial Services.

Is the stock market near a crash?  We know that many clients are thinking it, whether or not they ask it.   With the stock market at a record high and the end of the 2nd quarter approaching, this is not only a great time to review and evaluate your investments, but also to consider where you are in terms of your financial plan and your financial goals.

The year 2015 started with a weak quarter and economic numbers were mixed in April and May.  During this current bull market, clients have experienced recurring bouts of anxiety and panic. To date, the issues which created those panic attacks have passed and been followed by relief rallies in the market.  There is no question that the stock market is at a relatively lofty level.  The S&P 500 has been steadily rising since March 28, 2013, and the last official correction, a 10% decline in the market, occurred in May 2011.  So to answer the question, “Do we think that the stock market is near a crash?”, no!  However, the market could have a correction at any time.

We are still positive on the overall market for the following reasons:

  • Forward price to earnings ratios (P/E ratios) are high today, but well below the S&P 500’s record high of 24.5, reached during July 1999.  The forward price to earnings ratios of the S&P 500, S&P 400 and the S&P 600 are approximately 17.0, 18.6, and 19.3, respectively.
  • Earnings continue to grow.  During the first quarter (Q1) of 2015, earnings rose 11.5%, if you exclude the decline in the energy sector.  S&P 500 earnings have been tracking 7% annualized growth, which is at the historical trend.
  • Oil prices appear to have bottomed and the dollar appears to have peaked, ending the most recent panic.  As consumers gain confidence, spending should grow, adding momentum to an already upward trending stock market.
  • The European Central Bank (ECB) initiated a massive quantitative easing (QE) program on March 9th.  The bond purchase program and long-term decline in interest rates have led to improved economic indicators in the Eurozone.   During Q1, real GDP for the Eurozone rose 1.6%, which, though still sluggish, represented the best performance since Q1 of 2011.  This return was also the eighth consecutive positive quarter for the Eurozone.  Japan also reported a positive quarter of GDP growth.  Economic growth and low interest rates in Europe and Japan should add to economic and market growth in the US.

By:  Glen J. Buco, CFP®

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