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Is a Stock Market Crash Coming? Here’s What the Data Suggests

Is a Stock Market Crash Coming? Here's What the Data Suggests
Written by publishing team

Over the past 17 months, investors have enjoyed a historic rally. Since the bottom on March 23, 2020, broadband has been Standard & Poor’s 500 (SNPINDEX: ^GSPC) doubled in value. While we’ve seen some healthy rises from the bottom of a bear market throughout history, we’ve never seen the benchmark index double from lows in such a short time frame.

But such rapid gains in the wake of this economic uncertainty also raise the question: Is a stock market crash coming?

While no one knows for sure, we can turn to the glut of data to get a better idea of ​​what might await the S&P 500 and your business portfolio.

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The confluence of data indicates an increased probability of a crash or sharp correction

Perhaps the most troubling indicator of a significant stock market decline can be found by closely examining the price-earnings ratio of the Standard & Poor’s 500 Index. Shiller P/E takes into account inflation-adjusted earnings over the past 10 years.

On Monday, August 16, the Shiller P/E of the S&P 500 reached a nearly two-decade high of 38.91. For some additional context, the average Shiller’s 151-year P/E is 16.84.

Understandably, the democratization of financial statements with the advent of the Internet has helped expand earnings multiples exponentially over the past two decades. However, the previous four cases in which Shiller’s P/E exceeded the S&P 500 and settled above 30 did not end well. In each of these cases, the indicator subsequently lost at least 20% of its value.

Examining the way the S&P 500 bounced back from bear market bottoms also shows us. Except for the coronavirus crash, there have been eight bear markets since the beginning of the 1960’s. Each of these bear markets has been characterized by at least one decline of 10% (or more) within three years of bottoming.

In fact, five of these eight bear markets have experienced two double-digit percentage declines within three years of bottoming. The point is that a rebound from the bottom of a bear market rarely results in a higher straight line, as we have mostly experienced over the past 17 months. Historical data indicates that the market due to some potential downsides.

A quick look at the historical breakdown and correction data for the S&P 500 paints a similar picture. Since 1950, the S&P 500 has seen a double-digit decline of 38, according to figures from market analytics firm Yardini Research. This is a breakdown or correction, on average, every 1.87 years. While it is important to note that the stock market does not stick to averages, it is still worth noting the frequency with which the S&P 500 drops 10% (or more).

In other words, crashes and sharp corrections are a completely normal part of the investing cycle. Based on the above data, it shouldn’t surprise investors if a stock market crash is coming.

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But wait: there is another side to this story

Another aspect of this data must be told.

Although stock market crashes and corrections are common, historical data shows very clearly that there are advantages to staying the course as a long-term investor and buying big companies on any weakness.

For example, the investment landscape does not technically offer any guarantees. However, every crash or correction in history was eventually erased by the rally of a bull market. This means that long-term investors in the S&P 500 would be 38 versus 38 if they bought during a crash or correction, or simply held the S&P 500 tracking index since the beginning of 1950.

Furthermore, Crestmont Research examined the 20-year rolling returns of the S&P 500 between 1919 and 2020 (the 102-year period) and found that the total returns, including dividends, for any end year in this stretch would have yielded investors a positive return. Only two of the 102 end years (1948 and 1949) produced an average annual total return of 5% or less. Meanwhile, more than 40 years ending in this time frame yielded an average annual total return of at least 10%.

Basically, When What you buy in the S&P 500 is much less important than how much time you have. If you held your position for at least 20 years between 1919 and 2020, your initial investment has grown.

It also doesn’t hurt that the S&P 500 is made up of 500 of the world’s largest companies. Its components tend to be profitable, time-tested and able to take advantage of the disproportionately long period of time the US and global economies spend expanding, compared to contracting.

Finally, note that although crashes and corrections happen quite often, they usually do not last long. The average double-digit correction since 1950 has lasted 188 calendar days (about six months), while the modern-day average (that is, since computers became prevalent on Wall Street in the mid-1980s) is only 155 days (approximately five months). Relatively speaking, bull markets are measured in years.

Buying big companies and staying in the cycle is a proven path to building wealth.

A person typing on a laptop while sitting on the sofa.

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Three stocks to buy in the event of a market crash

Speaking of great companies, if a stock market crash rears its head sometime in the foreseeable future, the following three stocks would be ideal for impatient investors to add to their portfolios.


First, consider picking up payment processor shares Visa (NYSE: V). It is a company that benefits greatly from the steady expansion of the GDP of the United States and the world. Because periods of expansion last much longer than recessions, Visa is able to benefit from increased spending from consumers and businesses.

It is also important to understand that Visa is not a lender. It is firmly committed to its role as a leading provider of payment network services in the United States and the world. Since they don’t lend, Visa won’t have to set aside cash if credit card delinquencies spike during a downturn or recession. This is a big reason why Visa’s profit margin consistently exceeds 50%, and it’s why it bounces back much faster than other financial services stocks.

Surgeon holding a dollar bill with surgical forceps.

Image source: Getty Images.

intuitive surgical

The second no-brainer purchase during the stock market crash is a robot-assisted surgical system developer intuitive surgical (NASDAQ: ISRG). Because we don’t choose when we get sick or what disease(s) we develop, there is a steady demand for healthcare stocks that offer drugs, devices, and operating systems.

What makes Intuitive Surgical so special is its dominance of the assisted surgery space and increasing operating margins. As for the former, none of its competitors even come close to its installed base of 6,335 da Vinci surgical systems. Between the high cost of these systems ($500,000 to $2.5 million) and the hours of training given to surgeons, da Vinci buyers are likely to remain long-term customers.

When it comes to operating margins, Intuitive Surgical is poised to expand over time. That’s because selling tools and accessories with each procedure, as well as servicing his robotic systems, generates more attractive margins than actually selling the da Vinci surgical system. As its installed base grows, so do operating margins.

An electric tower next to three wind turbines at sunrise.

Image source: Getty Images.

Duke Energy

Finally, investors can buy shares of electric utility stocks with confidence Duke Energy (NYSE: DUK) If volatility increases and the broader market is trending lower.

The beauty of utility stocks is the transparency of cash flows and forecasts. This means that electricity demand does not change much from year to year, which leads to predictable profits and market-leading dividend yields. In the case of Duke Energy, investors are reaping a nice 3.7% return.

What makes Duke Energy a really interesting investment is what the company is spending from $58 billion to $60 billion on new infrastructure projects between 2020 and 2024. The vast majority of this spending will be on renewable energy, which will lower and raise the company’s electricity generation costs. its growth rate. As the United States turns green to combat climate change, Duke’s transition to cleaner forms of energy will benefit its shareholders.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of the Motley Fool Premium Consulting Service. We are diverse! Asking about an investment thesis — even if it’s our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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