The Stock Market is Broken: (Here's Why)

Credits: It Could Crash By 50%...Or More (Here's Why)

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The Stock Market's Structural Flaw That Could Trigger a 50% Crash

In a recent video titled "It Could Crash By 50%...Or More (Here's Why) ," popular YouTube host George Gammon explains how the seismic shift from active to passive investing over the last 20 years has fundamentally changed the stock market's dynamics.

Over the past two decades, more and more investment dollars have shifted from active stock picking to passive index funds. These funds simply buy all the stocks in a particular index like the S&P 500 rather than trying to identify undervalued companies.

As a result, stock prices have become delinked from fundamentals like earnings, cash flows and growth prospects. Stocks with already high valuations get bid up higher as passive inflows keep pouring in, while neglected value stocks languish regardless of their strong fundamentals.

This dynamic sets the stage for a painful reversion to reality someday. When the passive money flow slows for any reason, overvalued momentum stocks could crash back to earth. Highly leveraged positions would likely unwind quickly in this scenario, causing a lightning-fast selloff across the whole market.

According to data from Yardeni Research, passive and index funds now account for over 43% of total U.S. fund assets, more than double their share in 2008. This seismic shift gets to the heart of why another 50% bear market is very possible in the coming years.?

What the Experts Are Saying

Billionaire investor Stanley Druckenmiller, who manages Duquesne Family Office, warned the audience at the 2022 Sohn Investment Conference that today's market structure has set up "one of the biggest manias of all time." He highlighted epic fund flows into a handful of popular stocks as passive investors keep pumping money rather mindlessly into index funds. (See chart below ). Once sentiment shifts, the helpless momentum favourites could crash severely.

Other veteran investors like Carl Icahn and Jeremy Grantham have voiced similar warnings about the precarious underpinnings of today's lofty stock valuations. Passive flows have enabled extreme overvaluations for certain stocks, they argue, and the situation won't end well once gravity takes over.

Mitigating Risk in Volatile Times

This concerning backdrop means conservative investors should take a defensive stance now. Holding ample cash, gold, and other hard assets can cushion against drawdowns if passive unwinding sparks a correction. Sticking to value stocks with solid fundamentals can also help ensure resilience.

Additionally, prudent high-net-worth investors may want to diversify into alternative assets like private equity, private debt and private real estate. Their steady cash flows and returns tend to be uncorrelated to volatile public markets. Those able to access sophisticated strategies can tap unique yielding opportunities during market turbulence.

By partnering with a seasoned Private Portfolio Manager, investors can leverage their expertise and insights to mitigate risk and preserve capital in this treacherous late-cycle market.

The key is working with an experienced fiduciary who takes a client-first perspective focused on generating consistent positive returns independent of public equity swings. This can open the door to the kinds of alternative investment solutions typically reserved only for ultra-high-net-worth individuals.

Want to Learn More??

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