In the ten years since the 2008 financial crisis, Wall Street has staged a historic recovery.
Market Indexes are at all-time highs – since hitting a low of 6,443 in March 2009, the Dow Jones Industrial Average has climbed nearly 20,000 points in the last decade.
That’s a gain of over 300%.
Meanwhile, Silicon Valley juggernauts have vaulted the Nasdaq a staggering 478% from 2009 lows.
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And over the same period, unemployment rates have been cut in half while consumer confidence has risen to its highest level in 18 years.
However, as the market’s financial recovery moves through 2018, there are signs this historic comeback might be in trouble.
We always want our readers to be prepared for whatever the market throws at them, which is why we’re looking for the catalyst setting the stage for the next financial crisis.
The three recession triggers we uncovered might worry the average investor, but we’ve got you covered with a way to protect your portfolio…
Stocks Prices Are Breaking the Bank – and Causing a Bubble
The first financial crisis catalyst we’re looking at is the stock market’s soaring valuation.
Wall Street’s unquenchable thirst for stocks during the recovery has pushed thousands of shares to record-high market valuations.
This is ideal when a rise in a company’s share price is backed by sustainable growth.
However, the rise of many companies’ share prices has been so swift that they likely lack the solid financials necessary to justify their high share prices.
As a result, the market looks overbought – and setup for a significant pullback.
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This is especially the case when we consider a central historical parallel.
Since 1872, the Shiller price/earning (P/E) ratio, a P/E ratio that takes into account the cyclical nature of the business cycle, has sustained an average of 15.67.
Just before the 2008 Financial Crisis, the S&P 500’s Shiller P/E ratio was around 24, beating the average by nearly 10.
One month before the great stock market crash of 1929, the Shiller P/E was a staggering 32.56.
However, today’s Shiller P/E ratio for the S&P 500 sits at 33.27 – indicating that shares are outpacing underlying assets to a greater extent than they ever did during the last two great financial panics.
As a result, the average stock has a higher market valuation now than it did on the eve of both the Great Recession and Great Depression.
With the bull market now the longest on record and stocks sitting at historically high valuations, a downturn could be on the horizon. And the stimulus to send stocks tumbling is right around the corner…
Emerging Market Contagion Could Be the Market’s Death Knell
Our second potential trigger for the next recession could come from across the border.
In the last two months, emerging market currencies have hit recent lows, spiking domestic inflation and sparking concern that market instability could spill over into the developed world.
Over the last year, the Mexican peso, South African rand, and Indonesian rupiah are all down nearly 20%. The Turkish lira has fallen almost 40% while the Argentine peso is down by more than half.
On the whole, these drops are the result of lower capital flows into emerging markets. This means there are fewer developed-world currencies being used to purchase domestic goods or government bonds, which means there is little demand for emerging market currencies.
This year, capital flows into emerging markets have rapidly declined to less than half of what they were just a year ago.
Without these inflows, emerging markets have a hard time covering current-account deficits – deficits caused by a country spending more on imported goods than it earns from sending goods abroad.
Inability to adequately finance these debts could cause developing nations to default on their obligations, rocking the stability of creditors.
If nations that rely heavily on capital flow from Wall Street can’t meet their debts, investors are likely to lose confidence in banks’ ability to meet other outstanding obligations.
This is likely to set off a domino effect that will spark a severe downturn in American markets and burn your portfolio.
However, this next threat could cause even greater devastation…
Trade War Tariffs Could Topple Market Gains
The looming trade war is our third (and biggest) potential recession catalyst.
On Sept. 17, the White House introduced an additional $200 billion in tariffs on Chinese goods.
This was the latest move in a string of increasing aggressive trade maneuvers between the United States and China that are threatening to upend the current bull market and trigger the next financial crisis.
It’s increasingly unlikely that the United States and China walk back from the edge of a full-blown trade war.
American negotiators are intent on getting China’s communist government to make fundamental changes to the way it manages the nation’s economy and trade practices.
Reforming China’s intellectual property law, licensing of American businesses, and currency manipulation practices are all on the table for American negotiators.
However, Chinese officials are far more interested in making sure the United States adheres to rules established by the World Trade Organization – rules that the nation’s current tariff policy violates.
Inability for either side to meet demands will escalate retaliation by both sides – and burn stocks in the process.
You see, tariffs are likely to have an attritional effect on the profits of American manufactures, pushing the cost of production up and limiting shareholder returns.
According to the International Monetary Fund, trade conflict could cost the global economy $430 billion. That kind of fallout is sure to hamstring American GDP growth – and damage company profits.
As a result, this dramatic upset in international trade relations will eliminate the upside necessary to sustain this overvalued market.
And that’s likely to trigger the market’s next significant fall.
But you don’t have to be a victim when the next recession rolls around…
How to Survive – and Profit – from the Greatest Economic Crisis in 75 Years
The stock market crash of 2008 is nothing in comparison to the maelstrom that’s brewing now – 2018 will be the year of the greatest economic crisis of the century.
Jobs will suffer, the housing market will spiral downward, and millions of American seniors will face bankruptcy.
But if you know how to prepare, you’ll be one of the few lucky ones.
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