It's a question I get asked often since I wrote "A History of the United States in Five Crashes – Stock Market Meldowns That Defined a Nation." Until now, I've always been able to counsel that stock market crashes are comfortingly rare events that only occur when elements align, and that a crash is unlikely in the near future. Is this still the case? Let's discuss.
The most capricious element is a catalyst. That often has nothing to do with financial markets. In 1907, it was the San Francisco earthquake. During the Flash Crash, it was turmoil in the euro zone that nearly resulted in the collapse of the common European currency. Sometimes the catalyst is legal or geopolitical.
Interest rates have stopped their climb, but the yield on the 10-year Treasury has quadrupled over the last three years. Now, expectations for lower rates are evaporating; option traders would call that a synthetic rate hike. The private credit market is huge – some estimate it is as large as $3 trillion in the United States alone. There's a reason these private borrowers don't turn to traditional banks – they're usually riskier than a traditional bank wants to deal with. The International Monetary Fundwarned about private credit by saying: "Rapid growth of this opaque and highly interconnected segment of the financial system could heighten financial vulnerabilities given its limited oversight.