Is the Stock Market Going to Crash Anytime Soon?
From books to newspaper columns to radio shows to podcasts, you might have heard a financial analyst (or two or three) predicting a market crash. They point to economic and market indicators and forecast that the market is running too hot, too fast, and simply must drop.
But is the market going to crash anytime soon? And if it is, what can you do about it? Let’s take a look.
Will the Market Crash Soon?
It can be challenging to feel optimistic if you listen to the news. Congress avoided a debt ceiling crisis this past month by putting off the showdown until December. Inflation and interest rates are on the rise. And supply chain breakdowns continue to disrupt the global economy.
Meanwhile, speculative trading is rampant in everything from cryptocurrency to non-fungible tokens (NFTs). And the Shiller price-to-earnings ratio is at 38.93 as of this writing. The P/E is a measure of market valuations, and some analysts believe that the higher it climbs, the more likely we are primed for a market crash.[1] For instance, in October 2007, the ratio was at 25.7 headed into the Great Recession.
Meanwhile, market indexes continue to climb, with the S&P 500 doubling in value since its pandemic-induced nosedive on March 23, 2020. And what goes up must come down, right?
Well, not necessarily, and perhaps the best advice is to listen less to the media on this topic. As Weston Wellington, Dimensional Vice President, points out, the laws of physics don’t apply to financial markets:
“If stocks have a positive expected return, reaching record highs with some frequency is exactly the outcome we would expect. Using month-end data over the 94-year period ending in 2020, the S&P 500 Index produced a new high in ending wealth in more than 30% of those monthly observations. Moreover, purchasing shares at all-time records has, on average, generated similar returns over subsequent one-, three-, and five-year periods to those of a strategy that purchases stocks following a sharp decline.”[2]
So what is the forecast? We would argue that predictions are impossible. The “market” is a result of the buying and selling actions of millions of people, and so its ups and downs cannot be timed. But that doesn’t leave you helpless as an investor.
What You Can Do in Volatile Markets
Since no one knows the date of a market correction or crash, preparation and objectivity are key. You can start preparing by diversifying your investment portfolio. Own a range of company stocks to help insulate yourself against any meltdowns in a certain sector. For example, tech stocks may be hot right now, but the dot-com crash shows the danger of owning just one type of stock.
Consider investing in index funds or exchange-traded funds (ETF) so that you own a range of stocks in various industries. And though you may feel tempted to own just U.S. stocks, international holdings are essential to diversification.
Bonds can help offset equity volatility. Your particular ratio of equities to bonds should depend on factors such as risk tolerance, age, life stage, and short- and long-term goals.
Talk to a financial advisor for help determining your risk tolerance and an investment strategy. For example, our fee-only financial planning firm in Roseville and Folsom, CA, helps clients build a diversified portfolio based on their risk tolerance, personalized investment strategy, and financial and life goals.
Your diversified portfolio founded on a long-term investment strategy and stomach for risk can help you ride out bear markets (and invest sensibly in bull markets). It can help you keep your cool and avoid panic-selling. This objectivity is essential to being a successful investor.
Finally, when the markets drop, you can look for opportunities, such as buying stocks in solid companies whose stock prices have fallen. You can also convert traditional IRAs into Roth IRAs since the drop in your portfolio value means you’ll pay less in income taxes. And you can harvest investment losses to offset gains in current and future years.
Summary
Diversify, stick to your plan, invest for the long term, and avoid emotionally based decisions. This is the recipe for investing, no matter whether the market is soaring or crashing. Working with a fiduciary financial advisor who puts your interests first can help you build the blueprint for your long-term investing success.
Schedule a complimentary, 15-minute call with a fee-only, fiduciary financial advisor today to discuss your personal situation.
[1] Joshua Rodriguez, “Shiller PE Ratio (CAPE) Definition & Use as a Stock Market Price Gauge,” Money Crashers, 6 August 2021, https://www.moneycrashers.com/shiller-cape-pe-ratio/.
[2] Weston Wellington, “All-Time-High Anxiety,” Dimensional, 24 September 2021, https://www.dimensional.com/us-en/insights/all-time-high-anxiety.
This material was prepared by Kaleido Inc. from information derived from sources believed to be accurate. This information should not be construed as investment, tax or legal advice.
Parkshore Wealth Management is a family-owned, independent, fee-only Registered Investment Advisor serving the greater Sacramento area with an office in Roseville, CA. We partner with financially responsible individuals and families who are eager to take positive steps that will allow them to use their money to build the life they desire. The firm is led by Harold Anderson, CFP®, and Daniel Andersen, CFP®, both members of NAPFA, the country’s leading professional association of fee-only financial advisors.