The S&P500 is valued the second highest in US history, so when will the stock market crash? That is the $30T question. While countless financial firms and individuals are attempting to predict what will happen to the stock market and sharing those predictions, we believe the economy is so distorted in 2020 that it is impossible to truly predict when any sustained stock market crash will occur. That said, it has become increasingly clear that the US economy has been on life support since the Great Recession. And, by life support, we mean extreme stimulus and a wink and nod by the Federal Reserve to constantly bail out wealthy investors.
Five Reasons It’s Increasingly Difficult to Predict a Stock Market Crash
- Interest rates have been ultra low for over a decade and will remain low for years to come. The financial system nearly collapsed during the Great Recession. In response, interest rates were cut dramatically to stimulate the economy. By dramatically, we mean 0% largely since 2008. Remember those 5% risk-free investments in bank savings accounts prior to the Great Recession? Me neither. Today, the average savings interest rate is 0.06%. Moreover, the Federal Reserve recently clarified that interest rates will remain at 0% until at least 2023. Interest rates are this low on purpose. They force investors to make riskier investments and theoretically grow the economy. Today, you have to either invest in the stock market or hard assets like real estate to generate a return. Otherwise, your money loses value over time. Talk about being stuck between a rock and a hard place. Never fight the Fed.
- The Federal Reserve insures against losses. As the Fed has shown us time and time again since 2008, they are willing to do whatever it takes to bail out the increasingly fragile economy they’ve created. At the whiff of any stock market crashes, the Federal Reserve steps in and quickly provides investors assurances and/or actions that make it clear investors should never fight the Fed.
- Liquidity. It’s not just interest rates. The Federal Reserve has printed $6.2T (yes, 6.2 TRILLION DOLLARS) since the Great Recession to stimulate the economy. All of this money is mainly just sloshing around in the financial system. The stock market usually crashes when liquidity dries up. This means, there isn’t more money that can easily be invested into markets or other assets. We did see this in the March 2020 stock market crash, but the Federal Reserve quickly printed a few trillion, financed the CARES Act, bought a bunch of ETFs, and promised to do as much as needed to restore confidence in markets. Clearly, they succeeded so far. If we run into the same situation again, the Fed has made it clear they will continue to provide support. Never fight the Fed.
- Investors need a return now more than ever. Prior to the pandemic, there was hope that our economy could return to normal. Today, there is no reason for an investor to believe that our economy will return to normal anytime soon. So, what’s an investor to do? Invest in riskier assets like the stock market, duh. Never fight the Fed.
- Never Fight the Fed Mentality. They’ll bail out most investors until they won’t. Who is planning on selling their stocks? Once you do, where will you invest next? Another risky asset, no doubt. While this is ridiculous, investors have no choice but to operate in the realities we live in today.
What Could Cause a Stock Market Crash?
- Antitrust action against Big Tech. Since Big Tech is the biggest beneficiary of the pandemic while many other companies are still struggling, investors have piled in driving up massive valuations for various tech companies like Apple, Tesla, Zoom, and others. If the DOJ actually files antitrust action against Google and makes serious headway, investors may recognize that big tech isn’t as safe as it seems. Since most Big Tech valuations are through the roof (with the exception of a few, like Facebook), a correction in Big Tech would likely result in a new stock market crash.
- No new stimulus. If Congress doesn’t pass new stimulus for Americans in the near future, the economic recovery is likely to stall. If investors expect poor performance from company earnings, a market crash becomes more likely. The Federal Reserve is already pushing Congress to pass new stimulus. We all expect Congress will act and ultimately pass new stimulus, but what if they don’t? Or, they simply take too long?
- Inflation or stagflation. If the Fed achieves its goal of creating inflation above 2% every year and we enter an environment where interest rates start rising, stocks may need to come back down to reality as investors have less risky choices to invest. If we don’t see the expected COVID spike in the winter, we may even enter a scenario where stagflation becomes a real possibility. In this case, there will be high inflation combined with high unemployment. During stagflation, stocks and bonds typically perform pretty poorly.
- Whatever it is, it won’t be when we all expect it nor will it be driven by a COVID spike in all likelihood. Stock markets crash when the majority of investors least expect it. Today, investors already largely expect a potential COVID spike in the winter. If this happens, stocks may correct but resume their upward trend when stimulus is passed. Another few trillion in stimulus will keep this party going.
Don’t Time The Market, Find Strong Investments
While the broader S&P500 and Nasdaq have recovered, there is countless stocks that are still significantly down this year. Here is some relevant articles we’ve written in recent weeks to point out potential opportunities:
3 Stocks For Investing In The Recovery
Value Stocks vs. Growth Stocks in 2020
Government Sponsored Bubbles in 2020
It TRULY is impossible to time the market. Just take a look at the housing market, did you predict that the housing market would be largely booming during one of the deepest recessions in US history? Probably not. Of course, you should always leave some cash so you are ready to invest in new opportunities as they become available.
It’s nearly impossible to time a stock market crash. While the broad US stock market indexes have largely recovered since the March 2020 crash, there is countless stocks that are still at a significant discount today. Today, investors will be wise to invest in companies that will perform well during the recovery. The sure fire way to prevent long term losses is to invest, rather than gamble.