Are we heading towards another market crash? | Hacker News Reader

Are we heading towards another market crash?

6 pointsApane5 comments

I would consider myself a passive investor - I don't tend to check the market too often as I'm mainly invested in large U.S index funds.

However, as of late every-time that I do check the market it seems to be in the red. One of my holdings is the Vanguard Index fund and it's constituents are all large fortune 500 U.S companies. Needless to say, it's not a bad representation of where America is economically at given anytime.

So the fact that it's been on a downward spiral has raised some red flags for me, should we be worried? Is it likely that we are towards a recession?

For anyone with knowledge of economics it's a known fact that market corrections have to happen roughly every 10 years or so but we're pushing 6 at this point from the 2008 market crash.

Any thoughts, input here would be great.

Cheers!

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Almost certainly. The entire economy is running on smoke and mirrors.

Take a look at this article that describes how companies are borrowing money to buy stock in themselves in order to push up their own share prices: http://www.washingtonpost.com/business/economy/companies-tur...

Companies borrow money to rebuy shares when their earnings are greater than the interest cost. If your earnings are rock solid, then you earn a return by rebuying your shares. Of course nothing is guaranteed so you need some margin of error.

Interest < Earnings * risk

Not surprisingly, when interest rates are low, companies borrow more money to do this. It's also a feedback cycle where companies pay higher prices to buy their own shares. But it's still worthwhile because money is cheap.

Thus, answering the original question, a market crash won't likely happen until interest rates rise. Recently there have been data that suggests the Fed might be able to raise rates, thus the mini sell off. But there is nothing solid yet. It's not the big scare, but the environment is building that there could be one. Doesn't mean it'll happen though.

By feedback cycle I mean that companies tend to do more backbacks when the market is high. Which seems counter-intuitive, but makes sense because the market is biased higher when interest rates are low. And then company buybacks push it higher.

You mean stock buybacks?

That (and/or paying a dividend) is just what public companies are traditionally expected to do when they have extra cash, (or when they can borrow cash very cheaply, as is also the case now). Companies have basically been hoarding cash since the last recession, I think I've read that Fortune 500 companies' cash reserves are the highest they've ever been, so it's good to see that they are returning some of it to their investors now.

Probably. Despite all the propaganda, a bunch of "passionate" 20 something developers slinging javascript code are not worth $100K+.

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