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[Salah Maflahi]

Is A Stock Market Crash Predictable?

 

The stock market is a particular market where stocks and bonds can be traded throughout a nation. Stocks are what you own once you buy a share of the company you’re interested in trading. For example, if you buy a stock of Amazon, you would be considered a shareholder in other words you own a small piece of that specific company. To obtain that stock you would need to purchase it on the stock market. You can do this virtually or physical on exchange sites. Two of the most preferred exchanges in the U.S are the NYSE (New York Stock Exchange) and Nasdaq ( National Association of Securities Dealers Automated Quotations.). Throughout history the stock market has been through many devastating eras, this would be recognized as a stock market crash. A stock market crash is when a stock index decreases severely in a short period, for example, one or two trading days. As far as what causes the stock market to crash we may be uncertain of what the exact cause is, but different studies and investors have their conclusions. They’re people who have believed that they’ve come up with algorithms that’ll allow them to predict when a Stock market decline/crash will most likely happen. Then there’s those who oppose the idea of a stock market is unpredictable and it can go either way at any given time.
Although there are many investors, who disagree with the fact that a stock market may be predictable because if it were then, everyone would be wealthy. But according to UCLA physicist and complex-systems theorist Didier Sornette, he was able to create an algorithm that allowed to read stocks in a way which perceived whether it would have a significant downfall in the future or not. Sornette’s algorithm helped him analyze more than two dozen stock markets worldwide. This algorithm consisted of Sophisticated mathematics, statistical modeling techniques, and collective behavior theory. By using this algorithm, Sornette was able to develop a quantitative model which according to him it was able to predict the signature of a subsequent stocking market crash. Many have opposed his idea and claimed that his theory consisted of economic forecasting and that it isn’t useful at predicting changes of direction, but one thing that a lot of people were confused with is that Sornette’s theory was able to predict when a stock market crash is most likely to happen rather than where the stock market will be in a particular day or week.
Another thing that Sornette’s algorithm can predict is when a stock bubble will occur. A stock bubble is when investors place a high demand on an asset which causes the assets price to increase beyond a rational reflection of its actual worth. The downfall of predicting a stock bubble is that the algorithm won’t be able to predict whether the bubble will crash rapidly or prolonge a bear market. Sornette has proven his theory’s accuracy time and time again. On January 1999 he predicted that the Japanese Nikkei index would increase by 50 percent by the end of the year, while other economic forecasters have disagreed with him and claimed that the index of Nikkei would continue to fall. Later on, after that year the index of Nikkei increased by 49 percent.
Didier Sornette may not be the only investor/annalist to believe that the stock market crash is predictable. Famous investors David Stockman, Scott Minerd, and Ray Dalio also claim that a stock market crash is predictable. They may not all have the same strategy in analyzing the stock market, but they all can agree that a stock market crash is a predictability based on certain factors. One of the elements is the current economic state that the country is in. David Stockman, a former budget director for Regan White House, a former investment banker with Salomon Brothers and a former private equity investor. On an interview with Bloomberg Television, David stated that a stock market crash is imminent. He believes that the tax cut in 2015 enacted by Congress is likely to push federal budget deficit nearly 1 trillion dollars by the following year. A federal budget deficit will lead to higher interest rates; this will decrease private investment and increase exchange rates which are terrible for the market. Around that same year that David made his statement, there was an unwinding of the federals reserve of a sizable bond portfolio which it collected in the aftermath of its financial crisis.
Scott Minerd a Global chief investment officer and chairman of investment for Guggenheim Partners, predicts that the markets are potentially on a collision course for disaster in ther year of 2019. His reasoning for this was the fiscal stimulus at the end of the business cycle. He suspects that it has reached the peak point where the economy is already at its full employment mark. It will force the federal reserves to step in and be more aggressive which will cause an increase in the interest rates. If this was to happen small companies will find it very difficult to meet their obligations especially after the Trumps tax cuts act. Scott is comparing today’s market to the market of 1987, where the stocks suffered a major collapse. That year the market got off to a fast start before the investors began to fear that the Fed were to slow to address the inflationary pressures. He told clients earlier this year that today investors have the same sort of concern and fear that they had in 1987. Roy Dalio who’s known as the founder of the world’s largest hedge fund, The Bridgewater Association also suspects that there will be a collapse in the stock market since we’re only in the pre-bubble stage and it could get into the actual buuble stage. There’s a high possibility that this bubble will end up in with a significant collapse in the stock market. He predicts that significant failure will occur around the year 2020. He has a theory of the possibility of a stock market crash happening before the next election date is 70 percent. His theory consist of both the Trumps tax cut act and other future initiatives combined with a strong economy will force the federal reserve to raise the rates to fight against inflation. He also inquires that this isn’t easy for the federal reserve and that the risk for a recession is increasing.
According to the article “Harry Dent: Once in a lifetime crash coming in the next 3 years.” By Jane Wollman Rusoff there’s a possible outbreak of a stock market crash. On an interview with Jane Wollman, Harry Dent argued that we would be facing a stock market crash soon. Harry states that “Although Most bubbles have had strong fundamentals behind this bubble since early 2009 has been 100 percent generated by artificial stimulus.” Even though he can’t predict when the stock market will crash he believes that with the artificial stimulus we can expect the bubble to burst at any moment and that as time passes by the risk will only increase. Harry Dent’s simple indicators are the demographics, the geopolitical and the innovation cycle for the productivity for predicting crashes. Just like Roy Dalio Harry Dent also believes that the recession might take places in the early 2020’s and that all of his simple indicators are pointing at the same time and the same results. As for why he predicts there will be another global financial crisis. He thinks that instead of dealing with the debt problems we have we added more debt which causes us to become less stable. While these investors might believe that the stock market crash may be predictable by following a strict theory and studying the patterns over the years John Maxfield the author of “Proof That Market Crashes Aren’t Predictable” thinks otherwise. He believes that if it were possible to predict the stock market, then everyone would be wealthy because they would know when to invest and when to sell out on their investments with actual profits instead of losses. John Maxfield suspects that what causes us to believe that we are on the right path of prediction is more of a human psychological factor which builds our confidence in knowing that we can outsmart the market. Where in reality the market is unbeatable because it can almost foreshadow our next moves. Creating a delusional thought in our head that we might have the ability to outsmart the market.
Although the stock market might not be very predictable, I believe that there might be a way to predict that the state we’re in can build up for inflation which would, later on, cause the stock market to crash. For example, in our modern days, it’s become effortless to obtain things that are far above our budget which put us in a financial deficit. Automobiles have become very easy to get because we don’t need the cash up front we can obtain them with loans. Another thing is mortgage a lot of loan companies are just giving out loans, and the only thing that varies from one customer to another is the interest rate based on their credits. With this being said if there was a huge declined in paying back these automobile companies and mortgage companies; This will undoubtedly lead to a substantial upset in the market which may lead to a recession. But then again these might be only human psychological speculations.

References:

1. University Of California – Los Angeles. “Stock Market Crashes Are Predictable, Major Decline Is Coming In 2003 And 2004, Says UCLA Physicist.” ScienceDaily. ScienceDaily, 17 December 2002. <www.sciencedaily.com/releases/2002/12/021217073021.htm>.
2. Derousseau, Ryan. “When the Stock Market Will Crash, According to 5 Experts | Money.” Time, Time, 24 Apr. 2018, time.com/money/5235032/just-around-the-bend-this-is-when-the-stock-market-will-crash-according-to-5-famous-investors/.
3. Rusoff, Jane Wollman. “Harry Dent: ‘Once-in-a-Lifetime’ Crash Coming in Next 3 Years.” ThinkAdvisor, 14 June 2017, http://www.thinkadvisor.com/2017/06/14/harry-dent-once-in-a-lifetime-crash-coming-in-next/.
4. Maxfield, John. “Proof That Stock Market Crashes Aren’t Predictable.” The Motley Fool, The Motley Fool, 23 June 2013, http://www.fool.com/investing/general/2013/06/23/proof-that-stock-market-crashes-arent-predictable.aspx.

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