The Dow, S&P 500, and Nasdaq just closed at record highs for the second day in a row yesterday (June 1). But investors are concerned these soaring highs could end in a worst-case scenario: Stock Market Crash 2017.
A destabilizing event could lead to investors fleeing stocks, and that could be enough to crash the stock market. Just look at how the Dow reacted to the news released on May 17 that President Donald Trump asked former FBI Director James Comey to end the FBI's investigation into Russia. The Dow fell 373 points, its worst fall in eight months.
But that's not the only factor that could lead to a 2017 stock market crash. Right now, stocks are trading at historically high values thanks to a historically high amount of debt.
Here's why that could cause a market crash in 2017, and why a single event could be enough to set it off...
Why a Market Crash in 2017 Is More Likely Than You Think
A stock market crash could happen thanks to hugely overvalued stock prices.
Right now, the Shiller P/E ratio, a measure of stock market value, is at 29.78. That's 78% higher than its historical mean. But what makes this soaring valuation even more troubling is that it's even higher than it was before the 2008 stock market crash, when it reached a high of 27.4.
Soaring stock market valuations might not be a problem if stock prices were boosted by economic growth. But that's not what we're seeing right now.
Must See: This Great Depression-Era "Secret" Helped Transform Two Teachers into Millionaires. Read more...
Corporate profits are up 66% since the first quarter of 2009, when the stock market hit its lowest point after the 2008 financial crisis. But the Dow has roared 219% in the same period. The disconnect between corporate growth and stock prices is recent too. Profits fell 0.3% in the first quarter of 2017, yet the Dow is up 7.05% since the start of the year.
The stock market's performance is likely due to low interest rates from the U.S. Federal Reserve. Low interest rates have made borrowing money cheap, and corporations have taken advantage of it to buy shares of their own stock.
You see, after the 2008 financial crisis, the Fed tried to boost the economy by cutting interest rates. By the end of 2008, the Fed slashed rates to 0.25% compared to over 5% before the crisis started. That was meant to make borrowing money cheap in the hopes that businesses would borrow and reinvest in the economy.
Instead, public companies took advantage of the cheap borrowing costs and bought back shares of their own stock. These companies have borrowed $1.9 trillion since 2008 while purchasing over $2 trillion worth of their own stock. That sort of cash influx has helped boost stock prices.
But the trend of more borrowing extends to investors too. Margin accounts - brokerage accounts that let customers borrow money using their stocks as collateral - just hit an all-time high this week.
Yesterday, The Wall Street Journal reported margin debt on the NYSE hit $549.2 billion last month, a new record high. It's possible investors are using the debt on other purchases, but most investors use margin debt to buy more stocks.
That means billions and trillions worth of borrowing have helped boost stock market prices to stunning valuation levels. But that also means companies and investors alike can't afford to take losses because they have to pay back their loans, cheap or not. And that could mean a major sell-off if something spooks the market...
Could Trump Cause a Stock Market Crash in 2017?
The "Trump Rally" has seen the stock market rise since Election Day, with the Dow up 16% since then. But as president, Trump could cause the sort of destabilizing event that would start a Wall Street sell-off and a stock market crash in 2017...
For example, the United States dropped the "Mother of All Bombs" (MOAB) in Afghanistan on April 13, and the Dow immediately fell 135 points. The fear of an escalated foreign conflict could have spooked investors. But that pales in comparison to what even bigger events like impeachment or a war with North Korea might look like.
CNN's Wolf Blitzer interviewed Maine independent Sen. Angus King after news broke that Trump fired former FBI Director James Comey to slow the Russia investigation. King said impeachment might be on the table for obstruction of justice if the charges proved true.
What Can We Expect from North Korea in 2017
And tensions with North Korea could escalate. Just this weekend the rogue state test-fired another missile into the Sea of Japan, and today American and Japanese warships are making a show of force in nearby waters.
These large-scale events could be enough to send stock owners fleeing for safer assets, and that could end with the next stock market crash.
But Money Morning readers shouldn't panic. We have a strategy to stay in the market and protect your money during a stock market crash...
How to Protect Your Money from Stock Market Crash 2017
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