Financial Experts Warn of Imminent Market Crash — How to Safeguard Your Portfolio
Record stock market highs and unprecedented housing prices have led to financial experts sounding the alarm on an imminent downturn.
In a conversation with Business Insider, Toews Asset Management CEO and founder Phil Toews likened the absurdity of the current market to tulip bulb mania in the Netherlands.
Tulip mania was one of the most famous market bubbles of all time. In the 1600s, the prices of exotic tulip bulbs soared to today’s equivalent of hundreds of thousands of dollars. Clearly overvalued, prices eventually sank sharply, and the bubble burst.
Toews pointed out a similarity to current over-valuations, particularly for “Pop-Tart” memes. He referenced the recent sale of a 2011 digital rendition of the Nyan Cat, which has a Pop-Tart for a torso, that sold for about $590,000 in an online auction last week.
“People think, ‘Well that’s perfectly rational to pay $600,000 for a pop-tart meme,'” Toews told Business Insider. “We’re living in history through something that’s as bizarre as tulip mania. And everybody’s just like, ‘It’s fine.'”
Suze Orman, a personal finance media personality, has also weighed in on the issue. “I don’t like what I see happening in the market right now … The economy has been horrible, but the stock market has been going,” she said in a video for CNBC, as reported by MoneyWise.
Indeed, the stock market has seen unprecedented rises this year, even though the pandemic pushed unemployment to levels higher than during some recessions. In addition, inflationary pressures have been affecting commodity markets, but interest rates have remained low to influence economic recovery.
High valuations, both Toews and Orman add, have significantly contributed to a market bubble that is ready to burst. Tech stocks in particular soared this past year, with many failing to meet their earnings expectations.
“Ultimately, this market will fail, and potentially spectacularly fail, primarily because of valuations,” Toews told Business Insider, claiming that he expects a downturn of about 30% in the next 1-2 years once the economy ramps up and the Fed has no choice but to raise interest rates again.
“All of you have your heads screwed on backwards,” Orman told CNBC. “All you want is for these markets to go up and up and up. What good is that going to do you?” she asked, pointing out that the average person only invests any extra money they have into their 401(k) or IRA. Because that money will sit untouched for decades, Orman recommends buying low to maximize your investment “over the next 20, 30 or 40 years.”
She highlights that these kinds of markets do not benefit the average person at all and reminds investors of an important thing to always consider — the stock market is not the economy.
In order to safeguard against this kind of potential volatility, the average investor would do well to divest from stocks that are currently hot — i.e. tech and pharmaceutical. In the event of a downturn in the next 12-24 months, it would only be natural for these companies to enter a “correction” and fall further when it is their time, as they rose higher than most — often, without authentic valuation.
You can re-balance your 401(k) or IRA whenever you’d like, and as the country (probably) starts to enter the downturn, it would be a good idea to take a look at how weighted you are in certain sectors.
One signal that a crash in stocks could be close, Toews said, is a consistent period of high volatility — rises and falls of 3% or more in single days. This took place in 1999 before the dot-com bubble burst, he pointed out.
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