Stocks have risen this year, with the S&P 500 and Nasdaq adding to current record levels. However, what will the future bring for the Dow Jones Industrial Average and the S&P 500? Should you listen to pundits going on TV and talking about the next stock market crash prediction?
Blind recently ran a poll with 8,002 responses with 580 professionals commenting on their predictions, here are some key learning:
- 55% of professionals responded “yes.”
- 65% of Goldman Sachs professionals think there is going to be a crash within the next 6-8 months
- 64% of JPMorgan Chase & Co. professionals forecast the stock market to crash within the next 6-8 months
- 69% of Airbnb professionals believe the stock market is going to hit within the next 6-8 months
- 51% of Facebook professionals think there are going to be a crash within the next 6-8 months
- 48% of Facebook professionals expect there is going to be a crash within the next 6-8 months
A user at LinkedIn responded to the poll saying, “Some companies aren’t worth $2T or 10% of US GDP. But then the bubble could keep blowing so it’s hard to say when it’s going to pop.”
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Another user at Microsoft responded to the poll saying, “If anyone tells you what’s going to happen in the stock market they are either stupid or in on it”.
With Silicon Valley technology firms known for giving stock to their professionals, their predictions for a stock market crash are particularly interesting. But are these next stock market crash prediction responses accurate? Not usually. Let us delve a bit deeper into the data.
What is a Stock Market Crash?
A stock market crash is when equity prices drop in value, leading to investors’ losses and usually lower consumer confidence. A stock market crash is generally defined as a drop of at least 10 percent. Stock market crashes sometimes portend recessions, but they are often accompanied by robust growth; such a scenario happened during the 1987, market crash as discussed further below. However, sometimes market crashes could lead to a business downturn and cause the drop to become a self-fulfilling prophecy; in 1929 the market crash was a partial cause of the worst depression in modern times. We will discuss both scenarios in this article, so keep scrolling.
Stock Market Crash of 1929
The stock market decline of 1929 was the worst ever in the modern American experience. The stock market was the beginning of the end for the high growth period known as the “Roaring 20s” led by easy money. The long term implications of the 1929 crash were profound and led to the great depression, the election of Franklin Delanor Roosevelt, and more.
The crash led to other market crashes in countries across the world. One place hard hit by this stock crash was Germany, which led to many companies with debt declaring bankruptcy. A few years later the largest party to win the parliamentary election were the Nazis, setting the stage for conflict in 1939.
On September 3, 1929, the stock market peaked from which it did not recover for (arguably) 25 years. It cannot be overstated how big of an impact the crash of October 1929 was. Even if the market crash itself did not cause the Great Depression, it portended a much different and darker error for the economy and global markets. While in the long run, the stock market and economy recovered from the crash, the human misery until that happened was incalculable. In the next few years, there were so many bankruptcies that the US government had to institute a bank holiday and prevent withdrawals. Imagine going to the bank and hearing the teller tell you that you could not access your money.
It was a cascade effect. As financial institution bankruptcies increased, people would withdraw their savings leading to a cascade effect. Later the FDIC was created to prevent such an occurrence, and it held up reasonably well when tested in 2008.
The history of the Great Depression gets us to a crucial matter. Whether about the stock market or the state of the economy, the future is uncertain. No one would have made a prediction even after the crash of 1929 that a depression, world war, and cold war were coming. Who could have foreseen such a massive rise in bankruptcies which would have required a total restructuring of the US economy? History is a sobering lesson for those listening to TV pundits making a stock-specific or broad market prediction.
1987 Stock Market Crash
Can you imagine losing a quarter of your money overnight?! If you were an investor in 1987, you likely experienced a similar loss (and opportunity); Opportunity in that history shows that you bought stocks and likely did well if you focused on the long run. In terms of suddenness, the stock market crash of 1987 was probably the most shocking one ever, with the Dow Jones Industrial Average down 20 percent in a day. Black Monday” occurred on Monday, October 19, 1987, and the US was not alone in pain. Data are showing major world markets tanking between 20 and 30 percent in just one market trading session!
Even today, there is little evidence on what caused the crash of 1987 as the broader economy was relatively strong. A few pundits did, very few were making any next stock market crash prediction calls before the 1987 downturn, unlike 2008 (see more on that below). In hindsight, some say that stocks were record highs, overvalued, and growing concerns over the trade deficit’s growth. Additionally, data shows hedging strategies and insurance-related buying by computers exacerbated the crash and led to a panic.
2008 Stock Market Crash
The 2008 stock market crash was personal to me as I remember it happening in real-time. I was stunned when regulators refused to prevent the bankruptcy of Lehman Brothers in September 2008. The crash of Lehman led to a panic that AIG and other insurance companies would collapse. In the end, the US Government was forced to give banks a backdrop.
While few banks run during the 2008 economic crisis, some experts believe that the US got incredibly close to a run on money market funds. Experts believe that the Federal Reserve’s aggressive reaction helped prevent a cascade effect similar to what occurred in the Great Depression.
However, what caused the great recession started earlier. Arguably fueled by low-interest rates, speculators and banks begin to bet on the hot US real estate market. What made the crisis worse is that banks used a lot of leverage on real estate purchases. Low rates helped institutions make money as the real estate market boomed in the early 2000s. However, as the decline started in 2007, the leverage magnified the housing crash further.
2008 Recession Recovery
The stock market recuperation began in March 2009, when the economy still appeared very weak. Several banks announced that they expected profitability to return which cause the Dow Jones and other stock indices to soar. Additionally, a US government stimulus, including cash for clunkers helped consumer confidence recover.
However, economists admit that the economic upturn has been weak with a low growth rate for many years after the 2008 crash. The Federal Reserve cut interest rates in 2008 to zero and kept them there for many years. Even today, we still do not have ordinary interest rates or expect to see them in the foreseeable future. While stocks are at their highs, the economy in many ways has still not recovered from the 2008 great recession.
Markets Don’t Repeat – But They Do Rhyme.
Famous author, Mark Twain liked to quip “history never repeats itself but it rhymes”. The phrase means that while there are no exact repeats in life, traders can ascertain trends. For example, the Coronavirus pandemic is underrepresented, but there are many similarities to other prior pandemics, especially the 1918 Spanish Flu outbreak.
So too, when it comes to stocks on an individual level, and a broader level market certainly does rhyme. For example, if you save for retirement and let your optimism get too ahead of reality pre COVID, you likely suffered disappointments. However, the flip side is undoubtedly right; there is a pattern to human, financial behavior. When the market crashed this year if you bought stocks or other assets like real estate you already have a nice retirement nest egg a few months later.
There are a few reasons for this. Firstly, when the economy is in serious trouble, and there is a threat of depression, the Government will act healthily. For example, earlier this year as unemployment soared, the House passed a massive stimulus relief bill to help the economy; the relief bill was in particular honed in on those sectors which were near or dealing with bankruptcy. While it is hard to measure the exact impact of the COVID 19 stimulus, it likely helped overt a larger crisis.
However, do not get too excited as there is no guarantee in life. Markets are superb at the pricing in available data. For example, even as Congress debates the next stimulus in the post COVID era, it does not automatically mean that this will cause markets to go up. There is a good chance at this point that unless Congress releases a much larger bill that the market will go up at all on the news, especially with the stock market already at record highs.
What is the Worst Month in the Stock Market?
Historically if you are looking for the next stock market crash, September and October are your best bet; this has been mainly the pattern in years when an election took place. However, the declines in September are not just limited to the US and have been true worldwide. Some market forecasters believe the reason for a rough October may be due to seasonal bias.
However, before you plan to cash in on the next stock market crash prediction do not get too excited. Experts are still uncertain what causes the market to go down in September, meaning the effect could well go away over the long run. Additionally, even if we pin down a cause while history rhymes, it does not repeat, and as technologies change, it is even more likely not to work. Finally, smart traders already know this knowledge and are likely selling enough to offset any profits you will have using a similar strategy.
Is the Stock Market Going to Crash Again?
It is impossible to predict stock market crashes, Warren Buffett. Many pundits like to go on TV to expect when the next recession or when the next stock market crash will occur but few if any have the track record to back it up. Some of the more intelligent investors such as Warren Buffett tell us to ignore stock price predictions in the coming months and focus on the long term growth picture.
Additionally, it is tough to make the next stock market crash prediction. The reason is that the majority of the time the stock market is going up and not down. If it seems like the market is usually going down, there are higher ratings when focusing on doom and gloom. The market is up about 80 percent of the time. I believe this is why there seem to be more perma-bull experts than perma-bear ones. Just by luck, it is easy to predict the market is going up.
If you want to predict a market decrease, you need to hone in on the 20 percent of history when this occurs. Are you able to make such precious predictions? If so, there is no need to read further. I would suggest setting up a hedge fund to use this strategy to make a killing in the market for yourself and your clients.
How to Beat the Stock Market Crash?
If I knew with certainty how to beat the stock market, I would not be telling you but raking it in on my ability to predict the future! However, there are ways to optimize your stocks for success and condition yourself not to panic sell when stock prices tank.
The classic method for beating the market is Benjamin Graham’s “value investing” methodology. In Graham’s experience, it was impossible to predict what factors would cause the market to go up or down. However, looking at companies as business assets and only buying when you can get them on sale is a sound methodology for stock analysis.
For example, if a company has $1 billion in the bank and the stock price is only $500 million, it would probably make sense buying even if its management was doing terrible. This strategy seems to do well over an extended period, especially as the market experiences a down cycle. Ben Graham had a student who taught this investing method to the world; you may know his name; Warren Buffett. Ben Graham wrote his book, The Intelligent Investor during the 1930s but is so relevant to investing it reads like it was written even in the coronavirus or post COVID era.
Another strategy to protect against market declines is called hedging. To guard against the risk of stocks or other assets going down, you can short stocks you dislike. Another suggestion is to invest in non-correlated assets like treasury bills. When the equity market goes down, investors panic and usually rush to change their holdings into safe Government assets. For this reason, when stocks go down, Government bonds typically go up. You can balance your risk by creating an investment portfolio with exposure to a wide array of non-correlated investments.
How long did it take to recover from the 2008 recession?
It was not until six years later in June 2015 that the unemployment rate recovers from the 2008 economic recession losses. Many economists credit strong Government and Federal Reserve decisions such as stimulus and lending to banks for the gains since 2008.
What was the worst year for the stock market?
1931 was the worst year ever for stock prices with the S&P 500 crashing over 47 percent. The downturn in 1931 compounded losses from earlier, which led to a total decrease of 90 percent.
Is the US stock market in a bubble?
It is impossible to determine with certainty if the markets will drop in value in the short term. However, it appears that specific sectors of the stock market are several inflated based on standard valuation metrics.
How long do recessions last?
On average, economic recessions last 11 months, according to the National Bureau of Economic Research (NBER). The NBER defines a recession as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in GDP, real income, employment, industrial production, and wholesale-retail sales.”
What triggered the 1929 Dow Jones Industrial Average crash?
The stock market crash of October 1929 was caused by a long speculation period many times on margin. Other causes were a small recession that occurred in 1929 and the Federal Reserve raising rates.
Human nature does not change, even as technologies do. While few of the original Fortune 500 companies from the Great Depression are not around in the same form, people looking to get rich off stocks are the same. This mentality is right whether we are talking about the stock indices, cryptocurrencies, or the state of the real estate market. People overreact to a stock market crash and grow too euphoric when the equity market seems to be continually climbing. While we cannot help you predict when a market decrease will occur, if you study human nature in the form of behavioral finance, you can profit when it does over a long time period. Good luck!
Please note this article is not investment advice nor a prediction of the next stock market crash. It would be best if you read our full disclaimer for further information.