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The Dow's record-smashing rally is still going, as the index closed at an all-time high for the tenth time in a row yesterday (Feb. 23). But the soaring highs have some investors wondering, "Will the stock market crash soon?"
After all, the Dow has soared 14% since Election Day, racing between the 19,000 and 20,000 levels in the fastest 1,000-point jump in its history.
But surging stock prices could be a sign that a stock market crash is coming.
And we see other signs that the stock market is too high.
We want you to be prepared for every possibility at Money Morning. Before we show you how to protect your money from a stock market crash in 2017, here's why the market could crash...
These Signs Point to a Stock Market Crash Coming Soon
Stock market bubbles form when stock prices soar beyond their true value.
Let's look at the stock market crash of 1929. The crash destroyed 86% of the value of the Dow between 1929 and 1932. For every $1,000 you owned in the summer of 1929, you had $140 left in the autumn of 1932.
But what caused this historic stock market crash?
Stocks soared to record highs during the 1920s. During the Roaring '20s, investors even began to believe the stock market would never fall. That's why they took dramatic risks to buy more and more stocks, pushing prices even higher.
For instance, average investors borrowed $120 million in today's money to purchase stocks ahead of that crash. This was far too risky, but investors believed stocks would only go up. And if that was the case they'd be foolish not to take advantage of it.
But stock prices propped up by exuberant buying eventually fell. When they did, investors panicked. The massive sell-off that followed crashed the market and left investors holding worthless stocks. They were also unable to pay back their debts.
The same scenario unfolded more recently. The stock market crash of 2008 was the result of another bubble inflating prices beyond their real value. This time, the housing market led investors to believe housing prices would always rise.
Banks were willing to lend to even the riskiest of borrowers. And average home buyers were taking more risks themselves by buying homes more expensive than they could typically afford.
As long as house prices kept climbing, home owners were able to refinance to more affordable payments.
Wall Street banks repackaged mortgages into new types of tradeable assets. Soaring housing prices pushed Wall Street profits even higher.
But the housing bubble burst in 2007. Home prices plummeted 30% between 2007 and 2009.
And when housing prices fell, the stock market crashed. On Sept. 29, 2008, the Dow Jones Industrial Average fell 7%, the largest single-day loss in the indexes history. The Dow would lose 56% of its value by March 2009, wiping out $2 trillion in retirement savings.
Now we are seeing similar signs leading to a stock market crash in 2017. Here's why the stock market is too high...
Speculative Investing Is Inflating a Stock Market Bubble
Low interest rates have fueled surging stock prices instead of economic growth.
After the 2008 stock market crash and ensuing recession, the U.S. Federal Reserve slashed rates to historically low levels. Interest rates fell from over 5% to 0.25% in 2008. They have remained under 1% since then.
But drastically low interest rates have helped inflate stock prices.
The Fed cut interest rates to encourage companies to take advantage of cheap borrowing and expand their businesses. Instead, U.S. firms took advantage of cheap borrowing to repurchase shares of their own stock.
Since 2008, U.S. companies have borrowed $1.9 trillion, but they've bought $2.1 trillion of their own stock shares. Share buybacks have helped send stock prices soaring.
That's how the Dow has grown nearly 200% since March 2009, while the economy has only grown 30% in the same time period.
And while low interest rates encouraged share buybacks, low interest rates also meant bond yields fell. Investors who had typically used bonds for income were forced into the stock market for returns. This helped fuel rising stock prices even more.
But low interest rates are coming to an end.
The Fed raised rates twice since 2008, but they are still below 1%. However, at the December FOMC meeting, the Fed indicated it would be raising rates three times in 2017. That means rates are heading above 1% for the first time since 2008.
Low interest rates have helped inflate stock prices to artificially high levels. And higher interest rates could trigger a stock market crash.
That's why investors should be prepared for a 2017 stock market crash. But we are here to help with a stock market protection plan that will help you prepare for the worst.
Here's how to protect your money during a stock market crash...