- The US stock market could face collapse by 2050, according to new research by a Finnish economist.
- That’s because US stock growth is unsustainable, and a crash is bound to happen in the coming decades.
- The findings of the study mirror recent commentary from Wall Street legends, who are warning of an epic wipeout.
The next few decades could bring on an epic stock market collapse, according to a Finnish economics professor and researcher from the University of Vaasa who’s sounding the alarm over an “armageddon” financial crisis.
In a recent paper titled “Armageddon of Financial Markets: Is the US equity market eventually going to collapse?”, Klaus Grosby pointed to extraordinary events that have rattled markets over the past decade, including the 2008 financial crisis, the pandemic, and the Russia-Ukraine war, which rocked global financial markets since last year.
Those stressors have all had “dramatic” impacts on the world economy, Grosby said, disrupting supply chains and spawning high inflation that central bankers are still trying to control. So far in the US, the Fed has hiked rates 450 basis-points to fight inflation. But when combined with ballooning levels of US debt, central bankers could be forced to choose between relieving debt burdens or stamping out high prices, economists warn, meaning a severe recession and stock market crash could be on the horizon.
Grosby’s paper re-examined past studies of stock market crashes to determine if another cataclysm was headed for the US market. Specifically, he referred to a 2001 paper that concluded that the US stock market was growing at such a rate it was headed for “finite-time singularity” – meaning growth is unsustainable, and will eventually lead to an “apocalyptic collapse” in stocks.
The 2001 paper pulled 1790-1999 data from the Dow Jones 30 Index. Using a model that detects faster-than-exponential growth to identify stock market bubbles, the researchers concluded that the US equity market was headed for a collapse in 2052.
Grosby tinkered with the same model using stock market data from the S&P 500 over the past twenty years, which would account for the dot-com bust, the 2008 crisis, as well as the 2020 pandemic-induced recession, which all led to a steep drop in the stock market. He also re-calibrated the model, as other analyses show it could be overestimating the time it takes for a stock market crash to occur. That could be due to the “extreme monetary policies” of the central bank in previous years, which Grosby speculates could accelerate the onset of a financial crisis. He compared the coming crash to the events of 1987 and 1929.
“The stock market crashes of October 1987 and October 1929 which were investigated in the current research as robustness checks might serve as a guide of how such a collapse could evolve: For both events, market participants observed extreme reductions in market capitalization in a very short time,” Grosby warned.
His findings echo warnings from prominent Wall Street commentators, who say disaster looms over the stock market. Legendary investor Jeremy Grantham warned investors last week of a “stomach-churning” crash that could wipe away 50% from the S&P 500. Ex-Bridgewater CEO Ray Dalio has warned repeatedly that financial markets are headed into a new world order – and after the Fed’s latest rate hike, interest rates this high could easily spark a severe recession and a 20% plunge in stocks.