High Probability of a Stock Market Crash
Equity and bond yield differential
A year ago, on March 23, 2020, the US stock market formed a post-crisis bottom, after which it rose by about 75% on the S&P 500 index. Growth was the best post-crisis recovery in a year in the last forty years. The market showed a better annual result only after the Great Depression (+121%).
The recent rapid growth in the yield of treasuries and other negative factors have forced a number of leading banks and investment companies to warn investors about the growing risks of a decline in the stock market.
Last week, the US stock market hit new record highs, but this breakthrough was not confirmed by broad indicators of economic activity. This happens only on the eve of a deep decline in the stock market.
The differential in the yield of stocks and bonds may portend the collapse of the S&P 500, Citigroup warns.
The gap between US corporate bond yields and S&P 500 dividend yields has reached a level that preceded the sharp declines in U.S. stocks in 1987, 2000, and 2008, Citigroup warns. In early March, the yield on 10-year treasuries exceeded the S&P 500's dividend yield for the first time since July 2019.
Buffett's Overheated Markets Indicator
Buffett's indicator of overheated markets also broke the record of the dot-com boom.
The global indicator of the Buffett indicator — the ratio of the capitalization of all traded companies to global GDP-reached 123%, exceeding the previous record of 121% set during the dot-com bubble. This is a signal that global stocks are extremely overvalued and may collapse in the coming months.
The indicator is named after the head of Berkshire Hathaway, Warren Buffett, who in a 2001 article for Fortune magazine called the ratio of the total value of traded companies to GDP "perhaps the best indicator of what the market is currently evaluating."
The Buffett indicator, calculated for the United States, reached record values in February of this year — then the capitalization of the American stock market exceeded the quarterly GDP of the United States by more than twice.
The markets are concerned about increasingly loud statements about upcoming tax increases for corporations and rich people, which could make US stocks " worse than the market."
It would be too early to predict the collapse of the markets, especially since the movements of currencies and bonds are very restrained. Only their direction and synchronicity are alarming.
However, from now on, it is worth starting to carefully monitor the strengthening of various correlations for possible correction.