Salah Maflahi
English 2150
The stock market is a particular market where stocks and bonds are 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. Now in order 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 in many devastating era’s, The stock market crash. A stock market crash is when a stock index drops severely in a short period, for example one or two trading days. As far as what causes the stock market to crash we maybe uncertain of what the exact cause is, but different studies and investors have their own conclusion. 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 is those who believe that the stock market is unpredictable it can go either way at any given time.
UCLA physicist and complex-systems theorist Didier Sornette was one among those who believe that stock market crashes is predictable. Sornette was able to come up with an algorithm that’ll help him analyze more than two dozen stock markets worldwide. This algorithm was based on Sophisticated mathematics, statistical modeling techniques and collective behavior theory. Using this algorithm it allowed Sornette to develop a quantitative model that ca predict the signature of a coming stock market crash. Although those who opposed his claim would say that economic forecasting is not effective at predicting changes of direction. One thing about Sornette algorithm that a lot of people get confused with is that although it is able to predict when a stock market crash is most likely to happen it cannot predict where the stock market will be on a particular day or week. Another thing is that he can predict when a stock bubble will occur, but the down fall is that he won’t be able to predict whether it will crash rapidly or a prolonged bear market. Sornette has proven the accuracy of his theory multiple times. On January 1999 he predicted that the Japanese Nikkei index would rise 50 percent at the end of the year while other economic forecasters have disagreed with him and believed that the index of Nikkei will continue to fall. Later on Nikkei increased by more than 49 percent. Sornette and Zhou Also predicted that the Standard & Poor’s 500 Its index is currently above 900. They predicted that it will be dropping/crashing down by the beginning of the second quarter 2003 and that it will fall to approximately 700 by the first half of 2004. Sornette once said that “Stock market crashes are often unforeseen by most people, especially economists, one reason why predicting complex systems is difficult is that we have to look at the forest rather than the trees, and almost nobody does that.”
According to the some of the famous investors David Stockman, Scott Minerd, and Ray Dalio. Just like Didier Sornette they may all have different opinions but they all have related claims and that a stock market crash is surely predictable. David Stockman a former budget director for Regan White House, former investment banker with Salomon brothers and a former private equity investor. On an interview during a Bloomberg Television show. David Stock states that currently a stock market crash is imminent. Stockman believes that the recent tax cut in 2015 enacted by congress are likely to push the federal budget deficit to nearly 1 trillion dollars by the following year. Which happens to be at the same time of the unwinding of the federal reserve’s sizable bond portfolio which it collected in the aftermath of its financial crisis. Scott Minerd a Global chief investment officer and chairman of investments for Guggenheim Partners. Scott believes that the markets are potentially on a collision course for disaster in the year of 2019. His reasoning for this were the fiscal stimulus at the end of the business cycle. Its strong to the point where the economy is already at its fully employment mark this will most likely force the federal reserves to step in and be more aggressive which will also force the interest rates to spike. Once this happens Scott fears that as market rates spike small companies will find it very difficult to meet their obligations especially after the Trump tax cuts. 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 found of the world’s largest hedge fund the Bridgewater Associates also believes that there will be a stock market crash he also believes that we’re only in the pre-bubble stage that could possible get in to the actual bubble stage and the stock market crash might occur around the year 2020. His theory that the chance of the U.S. economy entering a recession before the next presidential election is 70 percent. His theory consist of the fact that both the Trump’s tax cut act and other future initiatives combined with a strong economy will force the Federal Reserve to raise rates to fight against inflation. He also inquires how this isn’t an easy task for the Federal reserve and that the risk of recession in the next year or two 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 will 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 the 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 Dents 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 point 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 was possible to predict the stock market then everyone would be rich because they would know when to invest and when to sell out on their investments with actual profits instead of losses. According to 90 percent of the time the market will most likely the predictions of the market. He also talks about 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 to knowing that we can outsmart the market. Where in reality the market is un beat able because it can almost foreshadow our next moves. This builds 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 away to predict that the state we’re in can build up for an inflation which would later on cause the stock market to crash. For example, in our modern days it’s become for simple and easy to obtain things that are far above our budget which put us in a financial deficit. Auto mobiles have become very easy to obtain 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 auto mobile companies and mortgage companies this will definitely lead to huge unset in the market which may lead to a recession. But then again these might be only human psychological speculations.
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