For all of those who are fond of statistics, here’s a pretty good reason why we US stock market is going to face a hard time in the next months, the only problem with statistics is that we still don’t know when the crash is going to happen
It will happen, only we don’t know when it will happen.
The best critics that people make to US stock market, is that its growth is de-linked from any dynamic in the real economy. This is not completely correct (we know, for example, that S&P 500 has been showing a good negative correlation with initial jobless claims in the US, as shown here), but it’s not even completely wrong.
As a proof of this, let’s take a look at the ration between market capitalization (of Wall Street) and US GDP:
As statistics says, this ratio should always move around its historical average: 68.2%.
Standard deviation (SD) is another statistical method to analyze whether our index is showing an abnormal movement or not. SD reports that, in a normal situation, the ration should be between the critical levels of 43% and 92%.
At the moment, our ratio is at 125,1%, which means that it is even above the double standard variation level, as the graph shows.
And if this weren’t convincing enough for you, take a look at one of Warren Buffet’s (one of the persons who managed to beat the market many times during the last decades) favourite index:
Don’t you see what these graphs are screaming ? Hint: it begins by “S” and it ends by “ell !”