Is The Market Going To Crash Or Not: Comparing Two Perspectives

As the stock market has steadily surpassed its own record highs all summer long, two distinct personalities have emerged among investors. Bulls and Bears both have ample ammunition to deploy Optimism or the classic combo of Fear, Uncertainty, and Despair (FUD). The question is: which opinion is right, if either?

To illustrate this perspective divide, I’ve chosen two opinion pieces published on Seeking Alpha in the past two days. The longer, by Raphael Rottgen is on the FUD end of the spectrum, while the brief rebuttal by Ian Bezer would have us all chill out just a bit. I’ll quickly break down their respective arguments and then we can all decide how we feel.

Bad voodoo in markets today: Retail Sales miss on negative print, UMich sentiment misses, yields down, banks bloodied by earnings. #bearish pic.twitter.com/SwZ71W6ewp

— Darshan Dorsey (@darshandorsey) July 14, 2017

The “This is How to Market Might Crash” Argument

Rottgen has a ton of reasons to be worried. Here are most of them:

A Black Swan event might happen: a 9/11, a housing bubble, a political fiasco. While this is always true, Rottgen argues that we are in a particularly perilous moment when valuations are too high.

The Calm Before the Storm. It has been eight years since our last major market correction (that’s extremely long from a historical perspective), quantitative easing is slowing, and growth has dulled in most major sectors.

Central Banks are overloaded with equities. If the market really is teetering on the edge, this could trigger a crash in the banking sector which, you know, would be bad. He cites the mild-mannered Swiss National Bank as an example, with their $63 billion in US shares.

A Mass Sell-off Could Easily Occur. And algorithms programmed to quickly do away with toxic assets could quickly turn this into a death spiral.

ETFs are Out of Control! This is perhaps Rottgen’s most interesting point, and one that asks an important question about the future of American finance. Rottgen says that a sector slump or the like would cause ETFs to lose significant value, because “bad” assets would bring down the value of the whole, even though “good assets” were still pulling their weight. This would bring down the individual prices of these good stocks, which would cause the ETFs to further lose value, and on and on into the void.

Hedge Funds are Overusing Put Options. In a market death spiral, this well would dry up for people on both sides of the deal, a la The Big Short.