Market Crash Imminent, Say Super Rich: Time to Panic?

According to CNBC, a UBS survey of high-net-worth individuals has found that more than half of the respondents foresee a market crash next year. Earlier this year, recession fears rose after the US yield curve inverted. Now, as it turns out, the yield curve inversion was a signal for the Fed to lower rates. But while recession fears have subsided, they can’t be totally ruled out. Let’s discuss this in perspective.

A market crash can never be totally ruled out. With that said, fear psychosis has risen in the market over the last year. The longest bull market in history is showing clear signs of wearing off. While the Dow Jones Index and the S&P 500 are trading near their all-time highs, they haven’t been able to decisively break the all-time high jinx in the last two years. Simply put, they’ve made all-time highs on more than one occasion in the last year, but each time, they rise only marginally above their previous highs.

Speaking of a market crash, several pundits have been forecasting a recession. They’ve cited everything from the yield curve inversion to the US-China trade war to support their claims. There have been sell-offs as we saw in the fourth quarter of 2018, but overall, they’ve been blips on the radar in this decade-long bull market.

Now, CNBC has reported that a UBS survey has found that 55% of the respondents see a major fall in equity markets next year. The survey was based on 3,400 investors who had investable surpluses of more than $1 million. To put it simply, the super rich fear a market crash next year. What could drive a crash, and should you actually be worried?

Some fear a major escalation in the US-China trade war could lead to a market crash. Michael Burry of The Big Short fame sees ETFs causing the next market crash. Berkshire Hathaway (BRK.B) chair Warren Buffett expects human greed to cause the next crisis. A Trump impeachment could also wreak havoc in the market. (Perhaps unsurprisingly, Trump himself is among the proponents of this theory.) Meanwhile, as the 2020 elections approach, many fund managers believe that a Trump defeat and an Elizabeth Warren victory could trigger a market crash. Warren’s views on taxation might not go over well with markets.

In my view, equities have always been risky. As things stand today, over the last decade, market risks have been similar to what we’re facing now. Given Europe’s debt crisis, Brexit, the taper tantrum, and China’s slowdown, markets have taken a lot of events in stride. While there have been periods of sell-offs, there hasn’t been any major market crash accompanying these events. The more important thing to consider would be that as things stand today, we don’t see any section of the economy that’s overheated. As for valuations, while they might appear a bit stretched, they aren’t high enough to raise red flags. But then, as old-timers would probably say, economists are better at analyzing a recession than predicting one.

As it turns out, recession pundits got it wrong this year as well. Read Should You Be Paying Attention to Recession Pundits? for more analysis.