The American stock market, for the most part, has been on a tear for many years now since 2009. It simply keeps rising steadily and is now considered to be one of the best runs for stocks in history. However, how long can a run like this really last? Financial experts have many varying opinions. Some say we’re in for another 10 strong years of profits, while others believe a market crash is imminent. The truth is, nobody really knows. However, we have stumbled across one market indicator that could present the answer everyone is looking for.
Throughout history, Americans tend to invest their money in either the stock market or real estate. Therefore, by analyzing the correlation of these two markets, a man by the name of Gray Emerson Cardiff was able to create an index comparing stocks to home prices. With this index, Cardiff came up with an indicator which he calls the “Sound Advice Risk Indicator”. To learn more about this indicator checkout the article from Time magazine.
The index in which the Sound Advice Risk Indicator is based on has been compiled with home prices and stock data dating as far back as the late 1800s. To calculate the index, Cardiff compared the level of the S&P 500 to the national median for new house prices. When the stock prices are significantly higher in relation to home prices, history has shown that a massive crash in the stock market follows shortly after. This level has been hit only 5 times since 1900, each time it was hit, the stock market crashed by 50% or more.
Now, for the first time since 2000, the stock prices relative to the housing market have hit this level once again. Therefore, according to the index and the Sound Advice Risk Indicator, the stock market may be in for a major decline. However, in the past upon hitting this level, stock prices continued to rise for months or even a couple of years thereafter. All in all, if history teaches us anything, it often repeats itself. And according to the Sound Advice Risk Indicator, the biggest stock crash in history may soon be coming.