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New Data suggests a Stock Market crash may be imminent

It’s been a buckle-up-and-hold-on sort of year for Wall Street and retail investors. The unprecedented uncertainty created by the coronavirus disease 2019 (COVID-19) pandemic shaved 34% off of the benchmark S&P 500 (SNPINDEX: ^GSPC) in a matter of just 33 calendar days during the first quarter. We also witnessed the fastest snap-back rally to new highs from a bear market low on record. All in all, we’ve crammed about a decade’s worth of volatility into a six-month window.

The scary thing is, we may soon be doing it all over again.

Aside from volatility, one thing the stock market isn’t short of these days are doomsday predictions — and you’re about to hear another one.

Previously, I’ve suggested that a stock market crash or correction was highly likely because historical data said it was. Following the previous eight bear markets, dating back to 1960, there were a grand total of 13 corrections/crashes of between 10% and 19.9% within three years of these bear market lows. This is to say that each new bull market underwent one or two sizable corrections relatively soon after bouncing off a bear market low.

However, this may not be the most damning evidence that the stock market is in trouble. The most concerning data point comes from Refinitiv Lipper, which has been reporting U.S. weekly mutual fund and exchange-traded fund (ETF) cash flows on a weekly basis for well over a decade. For the week ending Oct. 21, 2020, investors were net redeemers of fund assets (conventional funds and ETFs) to tune of $7.6 billion.

Here’s what’s concerning: This was the 11th consecutive week of fund outflows, when taken as a whole, and the 26th consecutive week for conventional fund outflows (excluding ETFs). Domestic equity funds are also riding a 19-week streak of ongoing outflows. The stock market might be near its all-time high, but this data suggests that investors aren’t exactly thrilled with the prospect of putting their money to work in equities right now.

What makes this even more worrisome is that these ongoing outflows come at a time when U.S. Treasury yields are within a stone’s throw of their record lows. Investors looking for guaranteed income are scraping by with only a 0.8% yield on the 10-year Treasury note. It’s almost certain that inflation will outpace 0.8%, on average, over the next decade, meaning T-bond buyers are going to lose real money while holding to maturity.

If investors aren’t tempted by equities with yields that are virtually nonexistent, Wall Street could be in some serious trouble.

Source: The Free Lance-Star

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