These Catalysts Could Easily Lead To A Market Crash In 2016

By Damon Verial

[In this article I don’t predict]…a hard date or magnitude of the next market crash…[but] merely point out that there are several catalysts [as discussed below] that could easily lead to a large market crash in 2016.

The Cyclical Nature of the Market

One of my main complaints about buy and hold investors is that they fail to recognize the cyclical nature of the stock market, of industries, and of their individual holdings. Just as we know that International Business Machines (IBM) consistently underperforms during Q1 and Q2, we know things about the wider market as a whole. For example, every seven or eight years, the bull market comes to an end, giving way to a (usually) brief bear market.

Low Oil Prices Are NOT a Catalyst to a Market Crash

These days, “market crash” and “oil prices” often come up in the same conversation but low oil prices are not a catalyst to a market crash. This goes contrary to most investors’ beliefs, but let me explain.

In the past, low oil prices implied lack of demand. A lack of demand then implies less traveling, less driving, and less production reliant on oil. In other words, low prices equated to low demand for the resource, which is essential to the U.S. economy. Today, however, low oil prices are driven by oversupply, not a lack of demand. So are oil prices important to predicting the market crash? I believe oil prices are not salient here, but a correlated factor, the strength of the dollar, is.

The Strength of the Dollar

A strong dollar is great for the individuals carrying it, assuming you’re leaving the U.S.. For everyone else, a strong dollar hurts. Consider emerging economies who see their currencies weakening against the dollar. Yes, exports to the U.S. might increase, but domestic investments on a whole become less appealing.

Instead of investing in the domestic market, citizens in China, for instance, would benefit from taking their money to the U.S. to buy bonds and stocks. This is exactly what is happening in China, despite the government trying to contain the act. The result is more investment in the U.S. and a bolstering of the U.S. stock market.