In today's video we're going to do an analysis of some factors that will help tell
us where are in the market cycle and around when the market might crash.
As always if you want to learn more about the stock market, personal finance and entrepreneurship
then consider subscribing to Cooper Academy.
And to be more on the ball hit that notification icon.
So one of the most important measurements that we have to look at when figuring out
if the market is overpriced or a bubble type market is the Shiller P/E ratio.
This is a measurement recommended by Warren Buffets mentor Ben Graham.
And it tells us the return we'll get on the overall market based on the current price
levels.
So currently the Shiller P/E ratio is 34.242.
This means the US market is priced at a 2.92% overall return.
It doesn't take a genius work out that that's pretty low.
But when it comes to money we have to put it somewhere.
So we must compare our overall stock market return with the returns we can get in other
places where we put our money.
One option is just to leave it in cash where you will get a 0% return.
The other option is the bond market.
So the 10-year treasury note currently has a yield of 2.8%.
And this is considered a zero-risk investment because it is backed by the government.
They can always print more money to pay it back.
So if we compare these returns we can see that the stock market return is just higher
than the bond market.
But overall that's some pretty similar returns for 2 different investments with very different
risk profiles.
The 10-year treasury being pretty much 0 risk and the stock market pretty high risk.
So that's one of the measurements we can do.
Compare the different returns where we can put our money.
Remember there are advantages and disadvantages to the different types of investments.
Ok now I want to delve into some of the measurements that Ray Dalio uses when figuring out when
the market will crash.
Why Ray Dalio, because he's known as the market timing expert so to speak, that his
gig.
So one measurement that Dalio uses is the unemployment rate.
This is a very important factor to look into when seeing where we are in the market cycle.
Whenever the unemployment rate get's low that is a sign that we are nearing the end
of a bull cycle.
Let's look at the history of previous market crashes and what the unemployment rate was
doing when they occurred.
So I'll take you back to the stock market crash in January 1973.
The Unemployment rate had bottomed at 4.9%.
Then the black Monday crash in 1987, the unemployment rate was close to the bottom at 6%.
Then the dot-com bubble in March 2000 the unemployment rate was at the bottom of the
cycle at 4%.
Lastly the housing bubble crash in 2007 the unemployment rate was 4.7%.
So as you can see there's a noticeable relationship between a stock market crash and a low unemployment
rate.
This is because when unemployment get's low it means we can't stimulate the economy
much more with increased workers, meaning things will slow down.
So currently we're at an unemployment rate of 4.1%.
How low does it have to go.
That is one thing that we just don't exactly know.
But the thinking is that it will bottom out in the next couple of years.
Another very important measurement that Dalio loves is the 10 year treasury minus the 2
year treasury.
If this number is 0 or in the negatives it means people will be more inclined to put
money in for shorter periods.
They don't want to put their money in for long because they get less of a yield.
So again this slows down the economy.
Let's look at the relationship between this factor and historical market crashes.
So unlike the rest of the crashes, in 1987 the difference was higher than normal at 1.3.
In the March 2000 crash it was low at negative .47.
And in the dotcom bubble crash it was low at 0.54.
So generally speaking the lower it get's the higher the chance we have at the stock
market crashing.
But again there is not a set number that it needs to get to.
As you can see from previous crashes the numbers were different.
That's why no one can exactly predict when the market will crash.
It's just not possible.
But what we can do is look at certain measurements that tell us around when the market might
crash.
And from these certain measurements that I have just shown you we can say that there
is a good chance that the market will crash in the next couple of years.
Ray Dalio said there is around a 70% chance that the market will crash before the next
elections in 2020.
So those are some of the main factors that I am looking at when figuring out where we
are in the market cycle.
It appears we are getting towards the end of a bull market run.
We can still play in the stock market but just play a little closer towards the exit
doors.
In my next video I'm going to show you guys what the best investing billionaires are saying
in the current market and I'll also show you how they are preparing their portfolio's.
As always I hope this video was helpful.
If it was please leave a like to support the channel.
Oh also I'll leave some links in the description to show you where to access the data that
I used in this video.
Thanks guys and have a great rest of the day!
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