For the past eight years, we’ve seen unprecedented growth in the stock market, with some proclaiming prices have risen so much it’s put us into a bubble. It seems unlikely that we’re headed toward another global economic recession, as there’s no central catalyzing event like the housing market bubble we saw in 2008, but there will almost certainly be some kind of correction in the near future. The rally must be nearing its end, and we’re predicting that by the end of 2017, the ongoing growth of the stock market will finally come to a halt.
Signs the rally is ending
Why is this the case? These are just some of the signs and complicating factors leading us to the end of the rally:
- Slowing consumer confidence. Compared to historical averages, consumer confidence in the economy is still high—it’s at just over 94 as of June. Compared to the 87 rating in the months leading up to the 2016 presidential election, that’s still pretty good. However, consumer confidence is always low leading up to an election, and once Trump took office, confidence rose to over 98. Over the first 6 months of the year, that score has dropped 4 points, which is a sign that consumer confidence is starting to slow down. If that downward trend continues, we’ll likely see significant drops in stock prices, consumer spending, and other secondary predictors of a full-on economic correction.
- Low retail numbers. United States retail sales have seen modest growth in the past few years, but back in May, retail sales hit a 16-month low—and there’s no sign that there’s going to be a turnaround anytime soon. Moreover, many retail stores’ sales are missing their projections by a significant margin, meaning the low sales figures aren’t something that retail leadership is predicting or anticipating. If the trend continues, it could start dragging down the rest of the economy.
- Low auto sales. Despite a surge in the availability of auto financing—which by itself generated concerns of an auto lending bubble similar to the mortgage crisis in 2008—auto sales are starting to plummet. This by itself isn’t an indicator of slowing economic growth, but it becomes significant when you realize how high auto loan availability is, and how low gas prices are. Consumers aren’t buying new vehicles, and it could be a symptom of a much bigger problem; consumers are starting to spend less, and have less faith in the economy’s ongoing growth.
- Stagnant personal income. Unemployment rates are falling, but that may not be enough to save the economy. Personal income growth is missing projected figures consistently, leaving the average American without the cost of living raises they’ve grown to anticipate. Salaries aren’t dropping, which is good, but for the economy to continue growing, Americans need to consistently make more money.
- Prices rising over value. Though there is debate on the subject, most investors agree that stocks are unprecedentedly high. P/E ratios for the S&P 500 are the highest they’ve been in many years, and continue to climb. This effect is especially apparent in the tech industry, where major startups and tech influencers are generating high stock prices without the internal company stability or consistent revenue to back it up. When prices become much higher than real values, it’s a natural setup for a correction—to reset prices back where they should be. If and when that happens, it could trigger a cascading effect throughout the market. Regardless of whether this happens, prices are generally higher than true market values, and they can’t continue rising without something to keep them in check.
What to do now
If you follow the signs, you’ll likely come to the same conclusion—that the market is about due for a correction. So what should you be doing?
- Don’t panic. First, try not to be anxious about the coming correction. Anxiety is only going to make your life more complicated, and widespread public panic could end up transforming a simple, healthy market correction into a full-blown recession.
- Readjust your portfolio. Lock in some high stock prices now, and shift your capital toward more conservative investments, like bonds.
- Keep diligent watch for signs. Keep an eye on how prices change in the next four months or so. If you notice any aberrant activity, it might be a sign to pull out.
As always, it’s hard to tell how the market is going to develop. The most experienced and educated economists in the world admit even they don’t fully understand how the market transforms over time. All we can do is look to the data we have, make the most intelligent, least risky decisions we can, and keep watch for further indications of changes to come.
