Is the Market Going to Crash or Not: Comparing Two Perspectives

As the stock market has steadily surpassed its own record highs all summer long, two distinct personalities have emerged among investors. Bulls and Bears both have ample ammunition to deploy Optimism or the classic combo of Fear, Uncertainty, and Despair (FUD). The question is: which opinion is right, if either?

To illustrate this perspective divide, I’ve chosen two opinion pieces published on Seeking Alpha in the past two days. The longer, by Raphael Rottgen is on the FUD end of the spectrum, while the brief rebuttal by Ian Bezer would have us all chill out just a bit. I’ll quickly break down their respective arguments and then we can all decide how we feel.

The “This is How to Market Might Crash” Argument

Rottgen has a ton of reasons to be worried. Here are most of them:

  • A Black Swan event might happen: a 9/11, a housing bubble, a political fiasco. While this is always true, Rottgen argues that we are in a particularly perilous moment when valuations are too high.
  • The Calm Before the Storm. It has been 8 years since our last major market correction (that’s extremely long from a historical perspective), quantitative easing is slowing, and growth has dulled in most major sectors.
  • Central Banks are overloaded with equities. If the market really is teetering on the edge, this could trigger a crash in the banking sector which, you know, would be bad. He cites the mild-mannered Swiss National Bank as an example, with their $63 billion in US shares.
  • A Mass Sell-off Could Easily Occur. And algorithms programmed to quickly do away with toxic assets could quickly turn this into a death spiral.
  • ETFs are Out of Control!!!!!!! This is perhaps Rottgen’s most interesting point, and one that asks an important question about the future of American finance. Rottgen says that a sector slump or the like would cause ETFs to lose significant value, because “bad” assets would bring down the value of the whole, even though “good assets” were still pulling their weight. This would bring down the individual prices of these good stocks, which would cause the ETFs to further lose value, and on and on into the void.
  • Hedge Funds are Overusing Put Options. In a market death spiral, this well would dry up for people on both sides of the deal, a la The Big Short.

For these reasons, Rottgen and his hedge fund are short on SPY, and he explicitly predicts a significant market correction in the next 3 to 12 months.

The “Too Much Bearishness” Argument

Ian Bezer keeps it short and sweet. His argument is basically thus:

  • The Market is Very Stable Right Now. And it is. For the past month, the S&P has been trading with a 2% range. That’s the most stable market performance since Lyndon B. Johnson.
  • Volatility Precedes Crisis. Biggybacking off the above point, Bezer reminds us that a short period of significant volatility has usually preceded a major correction. At least for now, no such volatility is in sight.
  • Stop Freaking Out for No Reason. Bezer says that anxious investors thinking it’s quiet…too quiet. Absent of a visible threat, they’re concocting them out of thin air.

So Who’s Right?

Both and Neither.

On the Rottgen side of things, yes, bad things happen. And if something really bad happened, well that would be really bad! It’s true that America’s stock market has been growing for a duration rarely seen in history but (as any investor should know) past performance does not predict future performance.

On the Bezer side of things, nobody can predict the future. Based on the information we have, this is no time to do anything rash.

Taking points from both, you’ve got to remember that investing is inherently risky. Your success is tied to events and decisions well outside your control. Your participation in investment methods must reflect your personal risk tolerance, and you should learn to recognize arguments based on knowledge, caution, and paranoia.

Cashing out might right this second might turn out to be the best decision, when all is said and done. But the arguments to take action on that expectation are speculative.

It’s likely that high performing securities will fall between the cracks in ETFs, restoring so-called “lost” market efficiency. Interest rates and treasury yields don’t appear to be cause for alarm. Market valuations are stable and slowly growing.

The duration of this recovery makes this a good time to reevaluate your investment strategy and allocations. Are you overexposed in the equities markets, such that a major correction would give you a loss you couldn’t afford or mentally handle? If so, stock up on cash and bonds. If not, stay the course. Just because some people are losing their cool does not mean you should also.