Are we heading for a Financial Crash?

There has been much noise in the recent financial media about whether we’re heading for another financial crash or not. The last crash of 2008 and its after-effects is still raw in many people’s memories, despite being 8 years ago. However, there are reasons to suspect some storm clouds are gathering once more on the financial horizon, so it seems prudent to look at this question again.

Big name financial speculators (such as Soros) have made the headlines recently with some bearish comments. Soros has returned to financial speculation and has (apparently) been buying gold (that famous safe-haven asset) implying a bearish stance towards the financial markets. Government bond yields are falling around the globe, flattening the ‘yield curve’ which historically presages a recession. Political worries are aplenty – Brexit, US elections, ISIS manoeuvres – which are also adding to investors’ unease and the amount of cheap money available from central banks has led to an explosion of debt taken on by Governments, households and companies. This doesn’t seem to be getting paid back anytime soon – overall debt has gone from 200% of global GDP in 2007 to roughly 250% now. The question on everyone’s lips is how will this normalise and what will happen when it does?

It’s not all doom and gloom though. Some equity markets around the world are flirting with all-time highs, which is bullish if you think it adds to the consumer’s overall wealth effect. Central banks seem primed at every twist and turn to help bolster confidence in the economy and would appear loathe to start normalising interest rates too early in case they kill-off any burgeoning pick-up in economic growth. In fact, a recent winning strategy has been to bet on unprecedented central bank interventions whenever markets worry and take a dip. Granted, global economic growth is not stellar at the moment but it is grinding along – indeed some of the economic indicators in the US look positively OK – the economy grew at 2.4% for all of 2015, the unemployment rate is running at c. 5% and inflation is contained. If you look elsewhere, China’s economic growth rate has indeed slowed from an ebullient 7% pa, but it is still growing….

Admittedly, there are trigger points out there for the beginnings of a financial correction. Asset prices (stock markets, house prices, Government debt) have been on an upward trajectory for several years now and it would be rare for them not to pause some point soon. Whether this turns into another financial crash though is the million dollar question, as is its timing. Trends can continue for longer than most expect.

Instead it might be more helpful to reframe the question and ask as an individual with investments, am I comfortable with my investments and the risks of investing? Do I understand that markets will go up as well as down but over the long run being invested in the markets has been shown to work due to the ‘8th wonder of the world,’ compound interest? Do I understand the concept of pound cost averaging and that if the markets do crash, this means I could still add to them at a lower price, enabling me to ‘buy low and sell high’ over the long run? Do I also understand that timing the markets is nigh on impossible and over the very long run it’s better to stay invested than dip in and out?

Many a pundit has gone broke trying to call the next crash, and Paul Samuelson’s famous quip that the stock market has predicted 9 of the last 5 recessions, reveals the errors of relying on forecasts too much. Maybe the best way of dealing with this question then is to adhere to a sensible, diversified investment strategy acknowledging that markets are variable, but over time will generally rise. Even in the darkest of times, storm clouds eventually do give way to blue skies.