Should we be worried about a stock market crash? Here’s what the data suggests


Over the past 19 months, investors have witnessed history on both ends of the spectrum. They pushed their way through the fastest decline of at least 30% in history S&P 500 (SNPINDEX: ^ GSPC), and then they reveled in the strongest rebound from an all-time bearish bottom. Since the trough of March 23, 2020, the benchmark has more than doubled in value.

But this monster rally begs the question: is another stock market crash or potentially abrupt correction imminent, and should you be worried?

The answer, based on an abundance of data, really depends on your investing style.

Image source: Getty Images.

If you are a short term investor / trader you have reason to be concerned

To be frank, we’ll never know exactly when a stock market crash will start, how long it will last, or how steep the decline will be. We also rarely know what will cause a crash or abrupt fix before it’s started. So, expecting the market to fall sharply is a bit of an inaccurate science. That being said, a number of figures suggest that a stock market crash could be looming on the horizon.

For example, the performance of the S&P 500 after each of its previous eight bear market lows, dating back to 1960, is revealing. In the three years since each of these bear market lows, the broad index has fallen at least 10% once or twice. We are now almost a year and a half from the low of the coronavirus crash, and the S&P 500 has yet to experience a double-digit percentage decline. In fact, we have now gone 10 months without even a 5% decline. Bouncing back from a recession has never been easier or easier.

Another major concern is evaluation. As of September 13, the S&P 500 Shiller price-to-earnings (P / E) ratio was 38.6, a nearly two-decade high. The Shiller P / E takes into account inflation-adjusted earnings over the past 10 years. There have only been five times in 151 years that the Shiller P / E has reached 30 and has stayed above that level for quite some time, including right now. In the previous four cases, the S&P 500 then fell by at least 20%.

Want more evidence that the market may be on the verge of a big correction? Take a closer look at margin debt – the amount of money investors borrow to invest or short sell securities. Over the past quarter century, there have been three instances where margin debt has increased by at least 60% in a single year: directly before the dot-com crash, just before the Great Recession, and in 2021.

While this may be pure coincidence, precedence suggests that a crash induced by a margin call is a possibility.

Long story short, if your average stock holding time is measured in days, weeks, or months, a stock market crash is something you really should be concerned about with the S&P 500 rallying over 100% in less than 18 months.

Person reading a financial newspaper.

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History suggests long-term investors have nothing to fear

On the other hand, if your holding periods are measured in years or decades, stock market crashes are not to be feared. In fact, it’s historically a great time to put your money to work.

For starters, while stock market crashes and corrections are quite common, they don’t last very long. Of the 38 double-digit decline percentages in the widespread S&P 500 since the start of 1950, the average time it takes to move from the high to the low is 188 calendar days (roughly six months).

The average time for corrections has shortened further since computers became mainstream on Wall Street and information could be easily disseminated with a single click. Since the mid-1980s, the average correction time has dropped to 155 days, or about five months.

While big downward moves in the market can affect us as investors, it’s much easier to stay invested knowing that bull markets outlast bear markets. It’s a simple numbers game that absolutely favors optimists.

Want more proof? Earlier this year, Crestmont Research published a report on 20-year rolling total returns (“totals”, such as including dividends paid) for the S&P 500 between 1919 and 2020. What Crestmont found is that each year ending in that 102 -year would have produced a positive total return, as long as investors held 20 years. Only two end years (1948 and 1949) produced an average annual total return of 5% or less, while more than 40 of those 102 end years produced an average annual total return of 10% or more.

The simple fact is this: If you buy big companies and hang on to them for long periods of time, you have a great chance to build wealth. The longer you are willing to hold onto, the more likely you are to make a lot of money.

A person writing and circling the word buy below a trough on a stock chart.

Image source: Getty Images.

Buy stakes in dominant companies and let time be your ally

Inevitably, a stock market crash will occur. Crashes and fixes are a natural part of the investment cycle and admission you pay to participate in one of the world’s greatest wealth creators. When the next crash hits, buying into big companies and letting time be your friend should be a lucrative recipe.

For example, MasterCard (NYSE: MA) is about as stable as among financial stocks. As one of the world’s leading payment processors, Mastercard enjoys long periods of economic expansion. If economies are growing, it probably means businesses and consumers are spending more. In addition, with Mastercard avoiding lending and focusing strictly on processing payments, it is not exposed to an increase in credit defaults during a recession. This is why it is rebounding so quickly in a post-recession environment.

Long-term growth-oriented investors might consider cybersecurity stocks CrowdStrike Holdings (NASDAQ: CRWD), also. Hackers don’t care about market turmoil, which is why protecting consumer and business data is a must-have service. CrowdStrike’s cloud-native Falcon platform oversees approximately 6 trillion events per week and leverages artificial intelligence to become smarter at identifying and responding to threats over time. In less than five years, CrowdStrike’s subscriber base has grown from 450 to over 13,000, and it has already met its long-term subscription gross margin goal.

Same Teladoc Health (NYSE: TDOC) would be a smart buy and hold action if the market collapsed or corrected significantly. Teladoc’s virtual tour platform is set to change the face of personalized care by facilitating the connection between patients and physicians.

Ultimately, this should lead to better patient outcomes and less money in the pockets of insurers. As Teladoc also acquired Livongo Health, a leading company in applied health signals, last year, it has a way to differentiate its platform and cross-sell to an established patient base. in chronic care.

On the next crash or fix, go on the offensive and let time be your ally.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.


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