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The Potential for a New Stock Market Crash
from: Maxx Trading GuidesAs a new year begins, there are many signs pointing to an impending long term bear market (a period of decline in the value of stocks). The first and most important indicator is the outrageous use of credit which has created a crisis in the United States. With house prices skyrocketing everywhere, homeowners have used home equity credit lines to take advantage of these inflated values.
They've been maxing out their credit cards and credit lines in order to buy somewhat frivolous items, such as electronics and luxury vehicles. Living too far above your means seems to be a national epidemic. What many consumers have failed to face is the harsh reality that this unneeded spending is done with borrowed money which must eventually be paid back.
Unfortunately, the U.S. federal government hasn't set a very good example with their own debt at $7.2 trillion. This national debt is growing by $1.71 billion per day. Between the government, business and household debt the country has accumulated over $40 trillion in debts, up from $13 trillion in 1990.
The stock market will certainly be affected by rising interest ratesand as they, it will become more difficult for debtors to pay the interest. Many people will either default or declare bankruptcy and when a large amount of people are unable to pay off their debts, it has an affect on the entire economy. The stock market is directly affected as both consumers and businesses reduce spending. Banks can then become insolvent because so many people are defaulting on their loans. This credit crisis will reach a boiling point in many ways, and that point it will drastically affect the stock and bond markets.
The boom in the housing market was fueled by mortgage rates that have reached all time lows. As these mortgage rates rise, which they surely will, the real estate market will become bearish. Potential home owners will be reluctant to accept such high mortgage payments, and inflated housing prices will begin to drop. In fact, current housing prices have become so inflated that many families can't afford to purchase a home.
The housing market has traditionally been a large portion of the foundation for the US economy, with about 25% of the economy in the real estate sector. This all makes sense when you understant that a house is the largest investment most people will ever make in their lifetime. Housing prices have a strong influence on the success of many major home improvement and home furnishing companies. Any industry related to building, designing or decorating a home is likely going to be negatively affected by any reduction in the housing market. Most banks are also supported by home loan interest.
There are several studies that support the fact that falls in the housing market are worth twice as much as falls in the stock market. If the housing market falls 20 percent it will have the same effect if the stock market were to fal 40 percent. The effect on the overall economy of the nation will be felt on a major scale. Given the overvalued real estate market of today, it wouldn't be too far out of line to predict that a 20 percent crash could occur in the near future.
Baby Boomers reaching retirement age will also have a potentially limiting effect on the stock market and US economy. Throughout the 1970s, 1980s and 1990s, the Boomers created massive capital flows into the stock market because of their interest in investments. As this generation starts to retire, most, if not all, will begin to cash out their stock investments. Social security will be virtually no help, so their only option for retirement funds is to cash their stocks in and invest in bonds.
The problem is that the Baby Boomers are the largest and wealthiest population group. Generation X, who's in position to purchase the stocks the Boomers are selling, is a much smaller generation group. In addition, their buying power can't compete with that of the exiting Baby Boomers. The increased cost of living has also resulted in less money for the X'ers to spend on investments.
A crash of this magnitude could also occur because of the continued outsourcing of jobs. As more people in the country lose their jobs to foreign workers, their inability to pay personal debts will cause them to go bankrupt. In turn, housing prices will begin to drop as foreclosures become more frequent. Stock prices and trading will be effected negatively and the retiring Baby Boomers selling stocks will also drive prices down. The result could very well be a long bear market.
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