The stock market has been on a winning streak for almost four straight years. The S&P 500 hit a low of 3,577 on Oct. 12, 2022. Since then, it’s more than doubled to around 7,750 today. The tech-heavy Nasdaq Composite has performed even better, up 155% during the same time period.
But all bull markets come to an end eventually. In fact, three of the most ominous warning signs that preceded the biggest market crashes in history have been flashing red for months. Here’s why history says a market crash might be in store for us, and how investors should react.
Missed Nvidia in 2009? This Rare Signal Is Flashing Again. In 2009, a “Double Down” signal flashed for a little-known chipmaker called Nvidia. For the first time in years, that same “Total Conviction” signal is flashing for a company 1/100th the size of Nvidia. Continue »
1. Sky-high valuations
Three of the biggest market crashes in history — the 1929 crash that started the Great Depression, the early 2000s dot-com crash, and the Great Recession crash of 2008-2009 — were preceded by skyrocketing market valuations. When those valuations were suddenly exposed as unsustainable, the market tumbled.
One easy way to measure the valuation of the market as a whole is to use the so-called “Buffett indicator,” named after legendary investor Warren Buffett of Berkshire Hathaway. This is the ratio of the total U.S. stock market value to gross domestic product (GDP), and Buffett himself once called it “the best single measure of where valuations stand at any given moment.”
The Buffett indicator has only been above 100% three times in recent history: It reached almost 150% in 2000, right before the dot-com crash, and it went above 100% right before the Great Recession.
The third time? Right now. The Buffett indicator currently sits above 200%, indicating that the stock market as a whole is severely overvalued.
2. High debt levels
Just before the 1929 crash, the number of stocks purchased on margin — that is, with borrowed money — rose to an all-time high.
Before the Great Recession, consumer debt levels soared as real estate investors took out subprime mortgages on houses they intended to “flip” for a quick profit. The nation’s total household debt level in the third quarter of 2008 — right before the stock-market crash — had hit a record $12.7 trillion. When the housing market collapsed, borrowers couldn’t repay their loans, resulting in an economic catastrophe.
In the first quarter of this year (the most recent quarter for which data is available), household debt hit a record $18.8 trillion. Meanwhile, the private credit industry is also facing rising defaults.
