In a recent Banyan Hill article, investing expert Ted Bauman explained three possible scenarios for a stock market crash. According to Ted, the current bull market may continue.
However, the odds are just as likely that it may plummet. Ted’s advice is valuable because of his experience and proven success. He was born in the United States but moved to South Africa for college. After he studied history and economics there, he moved forward with a career in the nonprofit sector that spanned more than two decades. He focused on low-cost housing projects that helped many people out of slums. One of the organizations that he co-founded has helped more than 14 million people in many countries.
During his years in South Africa, he gained knowledge and experience with low-risk investment strategies. Today, he lives in the United States and writes three newsletters that focus on low-risk investments, privacy, international migration issues and asset protection. Banyan Hill Publishing is grateful for Ted’s additional contributions. According to Ted Bauman’s latest article on the site, these are the three possible scenarios for a stock market crash.
A Return To The Average Ratio
Ted Bauman often reminds people that U.S. stocks are overvalued. Ted uses the CAPE ratio, which is Robert Shiller’s adjusted price-to-earnings ratio. The CAPE ratio compares corporate earnings to stock prices over a period of 10 years. With the S&P 500’s current CAPE ratio of 32, it is almost as high as its historical record. As Ted pointed out, the dot-com mania period saw a higher CAPE ratio. Also, the current CAPE ratio is double the average historical ratio. If the market returns to the normal ratio of nearly 17, there must be a drop of more than 35 percent. Ted said that such a shift would take more than a year to happen. Also, it could have two distinct effects.
The first potential effect would be that investors would realize that they could not get their investments back with future dividends. Since additional gains would only be speculative, the investors would bail to find profits. However, their efforts would yield a reverse effect. The second potential effect would be that alternative asset returns would become more appealing. Ted pointed out that Congress recently locked the country into one of history’s biggest budget deficits. Since there is no way out of it, the likelihood of alternative asset returns becoming more appealing is higher.
Yield Curve Recognition
According to Ted Bauman, one scenario is that investors will recognize a yield curve from the U.S. Treasury. Since long-term interest rates are staying low, the difference between them and short-term yields is a modest amount. This means that the bond markets do not expect anything phenomenal to happen with the country’s economy over the next several years. If a recession happens and causes a standard impact, the S&P 500 will likely drop by more than 25 percent. According to Ted, this could happen as soon as the fourth quarter if there is a majority shift in the House and if impeachment proceedings follow it.
Crash And Bounce
A third scenario is that a rise will follow a drop. This could happen if there is nothing wrong with the economy and the market. In this scenario, there would be a quick drop after rules-based selling. After this, there would be a partial recovery.
Ted Bauman compared the possibility of such an event to a similar incident that happened late in 1987, which represented history’s biggest Dow Jones Industrial Average one-day percentage drop. For a similar event to happen, the S&P 500 would have to drop by 18 percent. Ted pointed out that stocks were up by 10 percent by the end of 1987 after that historic day. In such a case, the ideal response is to wait it out instead of making panic-induced decisions.
Investment Protection Tips From Ted Bauman
Two of Ted’s important reminders for investors are to stay calm and to plan for the future. According to Ted Bauman, market volatility may be a sign of the second scenario starting to unfold. However, this does not mean that the other two possibilities are less likely to happen. It is possible that investors will see elements of all three potential scenarios happen. In the Banyan Hill article, Ted invited people to read his upcoming May issue of The Bauman Letter to learn about seven good strategies for the current market. These are some important expert tips for investors:
- Focus on risk reduction and diversification.
- Look for stocks with low volatility.
- Rethink and reorganize investment strategies with the help of an expert.
- Be sure that investment strategies are designed with a potential fast crash in mind.
- If there is a sudden crash, do not take immediate action.
Ted Bauman enjoys educating readers about the nature of the economy, and he helps people better understand the market’s many facets. He also likes to answer economic questions. Ted devotes much of his day to research and work and often puts in long hours.
Although many people only look to the mainstream news outlets and stock reports to gather their research, Ted looks for additional information in obscure places. With more information, he can make more accurate and insightful predictions. His track record shows his success in his methods. Ted Bauman joined Banyan Hill’s editorial team of respected investing experts in 2013, and he provides some free advice to Banyan Hill readers.
However, those who are interested in more in-depth advice from Ted Bauman can subscribe to one of his three newsletters, which are The Bauman Letter, Alpha Stock Alert and Plan B Club.
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