Swiss investor Dr Marc Faber, is predicting a 1987-type stock market crash this year – only worse.
Otherwise known as 'Black Monday' the market crash of 1987 saw the Dow Jones Index lose 22.6% of its value in one day. Markets around the world followed, plunging in spectacular fashion.
At the time, computer-based trading was blamed for making the situation worse, by flooding the exchanges with more and more sell orders until it became overwhelmed. With high-frequency trading making up more than 50% of US market trading volumes, it's not hard to see that computers could play a bigger part in the next crash.
Now Dr Faber, known as Doctor Doom has told CNBC that he expects a crash within the next twelve months, estimating the market will fall between 20 to 30%. Rather than blaming the problem on overvalued stocks, Mr Faber says the US Federal Reserve is also to blame, calling it a clueless organisation, leading to diminishing levels of investor confidence.
"This year, for sure – maybe from a higher diving board – the S&P 500 will drop 20%. I think rather 30%. Who knows? But all I'm saying is that it's not a very good time, right, now to buy stocks," he said.
That follows the lead of legendary investor Jeremy Grantham, who said recently that the US Federal Reserve is killing the US economic recovery, and the next bust will be unlike any other. Mr Grantham says over the next seven years the equity market will have negative returns, and assets were overpriced.
But investors may want to take both so-called experts' views with a grain of salt.
Mark Faber has been predicting a big financial bust for years. In November 2009, speaking at a conference in Singapore he said, "I think eventually there will be a big bust and the whole credit expansion will come to an end. The ordinary family will be hurt by that, and then in order to distract the attention of the people, the government will go to war."
In 2012 he was predicting a 20% market plunge as the US fell off the fiscal cliff (which didn't occur). Then in August last year Dr Faber was again predicting a crash. Sooner or later he'll be right and likely hailed as a true genius. Interestingly, most of the well known market commentators are those that predict doom and gloom – newspapers and television love it, it sells.
Warren Buffett on the other hand says the US economy is going to be just fine and equities were still the most attractive investment. Another legend, Howard Marks at Oaktree Capital says equities were no longer cheap, but there was no cause for panic.
Foolish takeaway
Foolish investors would be wise to ignore the doomsayers, and continue investing in high quality companies which can generate higher earnings over the next 10-15 years. Just beware of those that are priced for perfection such as REA Group Limited (ASX: REA), ARB Corporation (ASX: ARP), Domino's Pizza Enterprises (ASX: DMP), iCar Asia Ltd (ASX: ICQ) and iProperty Group Ltd (ASX: IPP). Any downturn could see them hit the hardest.
