Will a Market Crash Unleash the Next Great Depression?

Stock Market CrashThe recent spate of reported suicides among high profile bankers has gotten conspiracy theorists in a bona fide tizzy . Across the pond in England, ex-Deutsche Bank exec William Broeksmit committed suicide by hanging on January 26. A day later, a chief economist for Russell Investments named Mike Deuker reportedly leaped to his death down a 50-foot embankment off the side of a highway in Washington State. And in a grisly scene reminiscent of something out of a Lethal Weapon movie, Richard Talley, CEO of American Title Services in Colorado, was found dead in his home of multiple self-inflicted nail gun injuries. While the aforementioned conspiracy circle may find these acts as evidence that a market crash of epic proportions is about to strike, what’s truly frightening is that the signs are already there.

The Writing on the Wall

According to research conducted by Factset on behalf of Morgan Stanley Research, it’s expected that the annual S&P 500 consensus earnings-per-share may report far lower than hoped — from $125 in early 2012 to $112.

Of further concern to investors is the fact that stock costs remain high, priced at some 53 percent above their 10-year average. This was the case in 1929 and also the case in the early 2000s, before the last great market plunge.

Additional information from RBC Capital Markets, investors are displaying bullish market optimism. Historically, dangerous and costly market snap-backs have occurred whenever sentiment has reached too great an imbalance.

The volatility index — also referred to as the VIX — is currently trending at a low not seen since 2007. Investor complacency is one of the key factors playing into this. While this may appear to be a positive indicator on the surface, the fact remains that the moment you introduce one disruptive event into the mix, investors typically cash out and head for the hills.

Investment Ebook

Other Signs of Evidence

Even for the individual who can overlook these disturbing statistics, there are other indications that the stock market may be readying itself for a dramatic plunge — aided greatly by global uncertainties and incidents that have a far reaching ripple effect. The Turkish financial crisis has thrown the region into chaos. Chinese “shadow banks” and the instability caused there have put great scrutiny on the country’s economic woes. It’s also been reported that Argentina, struggling on the brink of national debt default, has taken its case to the United States Supreme Court to ask for payback forgiveness.

The Final Word

When you combine all of the above with other identified signs of trouble — including record high corporate profit margins that are poised to fall, margin debt cresting at record highs, and investors buying up mutual funds at about the same rate that preceded the bursting of the Tech Bubble — you emerge with a chilling picture of the rollercoaster ride that’s yet to kick into action. For the savvy investor, now may be the best time to watch and wait… and to seek out critical investment advice that could turn potential loss into profitable gain.