Mentz –¬† Experts Have Immediate Worries Over the Stock Market Correction Looming

By George Mentz    |   Wednesday, 29 September 2021 08:27 AM

If you search then Internet news, you will find varying reasons or triggers why the stock market may be volatile. If you scan the news, you will see analysis and quotes from top organizations such as¬†Morgan Stanley,¬†MarketWatch,¬†CNN,¬†Bloomberg¬†and¬†Barrons¬†—¬†all of which write about a stock market correction that may happen in the near term.

What are the primary Black Swan events that could cause a market crash? It may not be just one variable, but a combination of three or four variables that push the economy into difficulties.

Shades of the Dot-Com Crash?
Some experts claim that the record price action is mimicking late 1999, and it could spark a 10% to 20% correction.

Stock Market Correction Possibilities & Variables to Watch:

1.)  A Correction is Overdue?

* We have not had a correction greater than 10% since the March 2020 COVID outbreak low.

* Morgan Stanley’s global investment committee expects a stock-market pullback of 10% to 15% before the end of the year.

2.)  PE Ratios Hit a Record High in August 2021

* On Aug. 16, the S&P 500’s¬†Shiller P/E¬†hit a nearly two-decade high of 38.91. For a historical context, the average Shiller P/E dating back 151 years is 16.84.

3.)¬†¬†Delta Variant ‚Äď New Covid Strains

* The new variants of COVID are spreading. New COVID strains are hitting people who have been vaccinated and those who are not vaccinated.

* The economic problem with new strains is that governments worldwide are restraining travel. Without the easy movement of people, transport stocks, energy companies, and tourism stocks are heavily affected.

* Policy of unchecked & unvaccinated immigration may leave the pandemic uncontrollable for the next year or two.

4.)¬†The Fed ‚Äď Interest Rates and QE Quantitative Easing Tapering.

* Federal Reserve Chairman Jerome Powell may buy less bonds in the open market. Thus, less liquidity and stability.

* If Federal Reserve Chairman Jerome Powell raises interest rates, that raises the cost of student loans, auto loans, mortgages, and business loans. Thus creating artificial inflation. A meaningful correction will occur if interest rates are raised by any amount.

5.)  New Terrorism Possibilities ?

* If terrorism expands, a single event can create a dramatic stock sell off. It is reported that many top terrorist leaders have assumed new positions in Afghanistan. Nobody is sure if the world will calm down, or if new terrorist super states will create instability in Arabia, EU and USA.

* Domestic terrorism and riots in 2020 created much economic uncertainty because leftist insurrections in Washington DC created billions in damages nationwide & many problems with government functioning. For instance, the anti-Trump ‚Äúfire bombing‚ÄĚ of the church next to the White House caused the White House to go into ‚ÄúBunker Mode‚ÄĚ and caused a governmental shutdown.

6.)  Government Taxes & Spending

* If corporate taxes go back up to Obama’s 28% level and higher, the USA will again become the worst country in the world for corporate taxes. This will force money to stay offshore and companies will leave the USA

* Corporate tax hikes will reduce the amount of revenue available to pay wages and benefits for union jobs and employees.

* The government spending is actually keeping people from going back to work and also creating a shortage of skilled workers. This artificial wage inflation could hurt consumers and stocks.

* Personal Income Tax Rates are set to go up along with reductions in tax deductions.

* Estate Tax Rates are going up including higher capital gains taxes on estate assets.

* Capital Gains rates are going up big. This will affect long term gains. Expect to pay another 5-15 percent in federal taxes plus the Obama taxes. This would affect stock options also.

7.)¬†¬†The Cost of Energy ‚Äď Hurting Wages, Inflation, and Profits

* Since Trump left office, the cost of energy is up over 100%. While energy companies and some energy centric states do well with higher gas prices, real wages of workers is hurt by artificial increases of the price of energy and the associated taxes on gas.

* Moreover, tourism, transport and cost of food & goods are heavily impacted by the cost of energy. Thus, artificial energy cost increases actually creates inflation across the board.

8.)  Sovereign Risk and Geopolitical Concerns

* If any war breaks out, this could interrupt the global supply chain.

* Debt, printing money, and inflation are all affecting the risk of investing in nations or their currencies and companies.

9.)  Higher Fixed Income Yields

* If CD yields or Bond Yields go up, this could remove liquidity from dividend yielding stocks.

10.) US Currency and Crypto

* If the US currency loses its status and the reserve currency, this will greatly reduce the power and strength of the US currency.

* If the value of the dollar goes down, exports would increase, but the dollar remains stable.

* If Cryptocurrencies begin to take a market share of savings and investments; then, the dollar, bank cash deposits, and AUM ‚ÄúAssets Under Management‚ÄĚ may be reduced.

11.)  Supply Chain Issues

* In the last year, we have seen some shortages of: products, services, computer chips, workers, food, and other supplies including medical supplies and technological devices. If any link in the chain is disrupted, there may be a huge market correction or major damage inflicted upon particular industry sectors.

12.)  Consumer Confidence Big Losses

* In the last few months, consumer confidence took a beating. As per the Reuters, consumer confidence plummeted to decade low in August 2021. Further, consumers’ optimism about the short-term business conditions outlook deteriorated in August. Presently, only 22.9% of consumers expect business conditions will improve, down from 30.9%, and 17.8% expect business conditions to worsen, up from 11.9%.

13.)  Environmental Disasters

*  Fires, Earthquakes, Hurricanes, Flooding, Droughts, Disease, Heat Waves, Tsunamis, and Winter Storms all affect nations and business. Other disasters include oil spills, nuclear disasters, toxic waste and related damages to people, places and the economy.

14.) Unchecked Immigration

* Economic effects due to 2 million new immigrants coming to the USA during a pandemic and economic crisis. Will this affect unemployment, jobs, health care, education of citizens or local economies.

Economic Correction Conclusion:

In sum, this is a short list of potential problems that are looming. This list does not include bad political decisions made by lawmakers and leaders of any nation.

It seems that with the market at all time highs with the Dow around 35,000 and the NASDAQ over 15,000, stock markets are greatly overvalued. If corporate taxes go up, and individual tax rates are increased, this along with inflation and higher interest rates could be enough of a trifecta to manifest a 10%-20% correction.

Keep your ears and eyes open. If you hear that major banks or investment firms are putting cash to the sidelines, then that is a red flag event. Also, if Federal Reserve Chairman Jerome Powell raises rates by any amount,¬†then, the cost of money goes up¬†‚Ästand the markets will correct quickly.

At this juncture, there are no perfect defensive positions, but there are leveraged bearish exchange-traded funds (ETFs) and other hedging, or shorting, investment products now to permit speculators to¬†bet against the market. While nothing is perfectly defensive, stocks that are: ‚Äúdividend growers‚ÄĚ, financial stocks, and materials stocks tend to have some defensive and inflation protection. Further, people still argue for precious metals and related investments during tough times.

Overall, there is certainty in a few mathematical formulas. A Dow correction of 10% would be a subtraction of roughly 3400 points and 20% would be 6,800 point loss. Thus, a 20% drop would put the Dow at 27,800 and the S&P 500 down to: 3,566 from a high of 4,545. During these volatile times, some strategists say to park some money in cash. If you are a upcoming retiree, you may want to reposition some of your tax deferred investments into fixed income or cash to protect your TH ‚ÄúTime Horizon‚ÄĚ for retirement.

George Mentz¬†JD MBA CWM Chartered Wealth Manager ¬ģ is a licensed attorney and CEO of¬†GAFM¬†¬ģ¬†global education, which is an ISO 29990 Certified professional development company operating in over 50 nations. Mentz is an award-winning author and advisory board member to several companies around the world in education, charities, and FinTech Companies.¬†Mentz can be contacted at¬†www.GMENTZ.com¬†or at his global certification training company¬†www.GAFM.com