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The Historic Rise of the Stock Market: Are We Overdue For a Crash?

The stock market has been rising like never before. Should we be worried?

Aditya Kishore, Political Columnist

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Recently, the stock market has been rising at a meteoric rate. Most would consider this a good thing, but this sort of rise, historically, is always followed by a collapse, in a concept known as “the bubble.”  Essentially, the rise is temporary, like a bubble blown by a child, and will plummet after a quick rise, hence the “burst.” This is basic economic theory; hence, some are raising the alarm for an oncoming crash. But is this truly the case? Economic policies instituted by Trump and Obama have some claiming that the “imminent fall” is not quite a done deal, namely the majority of Wall Street investors. Predictions released seem to indicate that the stock market is in for another solid year, meaning that there is some controversy around the topic. As such, it may be prudent to review the stock market’s condition and similar situations throughout history, so the topic can be put to rest (at least for a while).

The first step would be to examine data from the past few years about the American stock market so that there is a fundamental basis to which one may compare relevant scenarios throughout history. For the purpose of consistency, this article will use the S&P 500 to gain a sense of the general stock market. The S&P 500, or Standard and Poor’s 500, is a collection of 500 stocks that is used to gauge the US stock market. It is widely regarded as one of the top three stock market indexes, along with Dow Jones Industrial Average and Nasdaq Composite.

The rise started on November 4, 2016, and peaked on January 26, 2018. (It proceeded to drop nearly $100, lending credence to the “burst” theory. However, we will use November to January for our purposes, because everything after could be part of an ensuing fall and therefore unreliable data.) That is the first parameter: the rise lasted one year, two months, and twenty-two days. Next, one examines the increase: the S&P 500 increased around 788 points ($788) and increased around 38%. This should be enough to filter through some historical results. The closest comparisons? An examination of August, 1998 through May, 2000 shows the S&P rising some 600 points over almost two years. The result is not promising: it was almost immediately succeeded by a multi-year downturn that left the market worse than it was before the original rise. The next closest comparison? July, 2006 to October, 2007. For those who don’t already know, the S&P 500 rose 400 points in one year and four months. What happened next led directly to Obama’s election. The worst crash since the Great Depression sent the market spiraling, and gave the new millenium its first big downturn. Now, this is even less promising, and paints a vivid picture of the rise as a harbringer of doom. And that is something we should be scared of.

However, there are several flaws with this line of thinking. First of all, the S&P 500 only goes back to 1998, like most stock market indexes. Therefore, there is only 20 years of data to examine, and that simply isn’t enough to draw conclusions. Furthermore, the most recent comparison is from 2008, and, as was mentioned, there has been quite a lot of economic advancement in the 10 years since. But it may be recent enough to be an accurate predictor if new economic policies cannot prevent it. Therefore, it is necessary to look at these policies and determine if they could stop a downturn. And early results? Well, they don’t look so promising. Trump repealed the Dodd–Frank Wall Street Reform and Consumer Protection Act, which is what gave the economy a lift after the dreadful fall of 2008 to 2010. Analyzing recent congressional acts, the situation starts to look truly dire: our government did nothing to replace the act and hasn’t improved other economic issues, for the $556 billion trade deficit in 2017 was 11% worse than 2016. As such, as much as data’s limitation seems to push back the argument of doomsayers, the signals of a massive downturn are everywhere, and they can’t be ignored. Summed up? Buyers beware!

 

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