The Stock Market Crash Could Cut Values in Half

Not everyone will call yesterday’s drop a stock market crash… yet. But now it is admitted that a crash might be a reality.

Henry Blodgett begins his post in Business Insider by saying that he is not predicting a crash:

After meandering higher for most of the year, the stock market is now sputtering.

That’s triggering chatter about a minor “correction,” which many people believe is long overdue.

And maybe that’s what we’re at the start of, a minor correction. Or maybe this is just a blip, and the brilliant and prudent Jeremy Grantham is right that we’re on the cusp of a new bubble that will take the S&P 500 up another 10% to 15% over the next year to 2,250. (As a stockholder, I sure hope so!) Or maybe we’ll get both — a minor correction and a new bubble spike. Or maybe we’re just in the middle years of a fantastic bull market.

I don’t know. (Neither does anyone else, by the way.) I’m also not predicting a crash.

So, he certainly not predicting a crash because he just said so…

One thing I do know, though, is that stocks are extremely expensive on every valid historical measure I know of. In the past, this level of overvaluation has presaged poor long-term returns. So I’m not expecting my retirement account to do well from this level over the next seven to 10 years.

The other thing that this level of valuation has also often preceded is something much worse than a “minor correction” — a crash. And there are other things that are happening now that have also preceded crashes.

So I would not be surprised to see stocks fall ~50% from this level in the next few years. And, if that happens, you shouldn’t be surprised either.

A crash of that magnitude wouldn’t even make stocks “cheap.” It would merely take them back to their long-term average. And to deny the possibility that stocks might someday drop back to their long-term average seems the height of delusion to me.

I don’t know the future any more than Blodgett does, but I think he is trying to deliver really bad news while encouraging readers to not realize just how bad it is. If stocks are so overvalued, then it is hard for me to understand what is keeping the prices so high beyond irrational exuberance. And if that is true, then it would be pretty understandable if exuberance turns into panic.

What we need to be asking ourselves is why our government pretends a rising stock market value has anything to do with a good economy. Many Americans realize that nominal wealth that can evaporate in a short time cannot possibly be used as a reason to believe in economic growth. But our media and our government still tries to convince us otherwise.