Posted On April 4, 2018
Why is the stock market crashing?
I’ll discuss the short-term perspective on what is going on and the long term.
I’ve been writing about the risk the stock market carries for ever now. However, nothing was really happening until the last two months when volatility spiked and stocks are actually below their all-time highs.
Volatility has increased and the daily sharp up or down moves tell us the market is looking for direction. Now, there are two ways to look at what is going on, one is the short term way that looks for clues about what has pushed stocks down 3% on Monday while the other is the longer term perspective that has pushed Buffett to amass $116 billion in cash on Berkshires balance sheet.
So, let’s discuss the short-term view first and then the long term view.
Short term view on the stock market
Suddenly, since the market peaked in January, investors got jittery about what is going on amidst fears of trade wars, tech regulation and higher interest rates driving the economy into a recession. The sad thing is that their fears are well founded.
So, why did stocks start declining just in January and not earlier? Well, most investors don’t look at fundamentals but look at factors that will push stocks higher. We have to look at what pushed stocks higher in 2017. The answer is simple, higher earnings growth thanks to lower taxes and higher expected earnings. The market always prices in what will most likely happen so 2017 was about pricing in what will happen in 2018 so that now suddenly the market has nothing to look forward to as a catalyst to push stocks higher like it was the case in 2017.