The foreign media quoted Sean Williams, a senior U.S. investment analyst, warned that 3 major signs indicate that the Nasdaq Composite Index is afraid of a “full-scale collapse. However, for long-term investors, this may be a “blessing in disguise”, because it will be a good opportunity to enter the execution of flat goods.
Williams recently wrote an article in the Motley Fool, pointing out that three major factors, including high valuation levels, doubts related to the mutation of the New Coronavirus (CCP virus) and vaccinations, and the increased leverage ratio of retail investors, could lead to a sharp drop in the U.S. Nasdaq.
He cited data from corporate data provider Siblis Research, which showed that at the end of last year, the extended P/E ratio (trailing P/E) of the Nasdaq 100 was 39.5 times and the cyclically adjusted P/E ratio (CAPE Shiller P/E ratio) was 55.3 times. With this data, the index ended last year with a retrospective P/E ratio that was equivalent to 2x at the end of 2018, and a cyclically adjusted P/E ratio that was well above historical norms.
Not only the Nasdaq 100, but also the S&P 500’s cyclically adjusted P/E ratio of 35.3 times as of March 10 is more than twice the average of 16.79 times over the past 150 years, he said. In retrospect, cyclically adjusted P/E ratios of more than 30 times have occurred four times, with the end result being a plunge ranging from 20 to 89%, so when valuations are this high, a bear market is always a possibility.
Last September, polling firm Harris Poll released a survey showing that 23% of retail investors buy options, another 10% speculate on stocks through margin trading, and another 10% buy options and speculate on stocks with margin trading, meaning that up to 43% of retail investors are using some form of leverage to speculate.
He said that although things have been going well for these retail investors over the past almost 11 months, the leverage ratio has been a bane and could lead to margin calls if the stock market starts moving in the wrong direction, and historically, most stock market crashes have been further exacerbated by emotional short term trading and margin calls.
He stressed that these 3 major factors that could lead to a crash do not mean that a crash is imminent, but if the NASDAQ does crash, it may instead be a blessing in disguise, as historically, stock market crashes are only short-lived, and for long-term investors, it is a great opportunity to buy shares of good companies, and eventually all major U.S. indices, will recover from the crash and correction. He advises investors to be patient and watch how growth stocks respond to their first real challenge since March of last year. If you have some cash on hand, it’s not necessarily a bad thing when the Nasdaq plunges.
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