Randomly came across this article and after I read it I jumped down a rabbit hole of other crash articles. All this is pretty confusing to me and thought I needed to ask the TBH brain trust about it. So what do you guys think is coming in the months ahead? I know it’s pretty wild with inflation, used cars, lumber, fuel, groceries.
Ready or not, a stock market crash is coming.
Although we'll never know precisely when a crash will occur, how long it'll last, how steep the decline will be, or (in many instances) what the catalyst for the decline will be, history shows that crashes and corrections are a normal occurrence. History is also pretty clear about the general time frame when these declines occur -- and it isn't good news if you're looking for this young bull market to stretch its legs.
A hand circling and drawing an arrow to the bottom of a steep downtrend in a stock chart. IMAGE SOURCE: GETTY IMAGES.
One of the biggest red flags can be seen on the valuation front. The S&P 500's (SNPINDEX:^GSPC) Shiller price-to-earnings (P/E) ratio -- a measure of inflation-adjusted earnings over the previous 10 years -- closed this past week at 37.28. For reference, that's more than double the average S&P 500 Shiller P/E dating back to 1870.
The concern is that in the previous four instances where the S&P 500's Shiller P/E ratio topped and sustained 30, the index went on to lose at least 20% not long thereafter. Precedent suggests that premium valuations like we're seeing now aren't well-tolerated for long periods of time.
History also sheds light on how the markets typically respond following a bear market bottom. At no point over the past 60 years has there been a bear market that didn't correct between 10% and 19.9% at least once within three years of hitting a bottom. We're now more than 14 months removed from the March 2020 bottom and have yet to see a double-digit percentage retracement in the benchmark S&P 500.
Additionally, stock market crashes and steep corrections are commonplace on Wall Street; they're the price of admission to one of the world's greatest wealth creators. Since 1950, we've witnessed 38 double-digit declines, or one every 1.87 years, on average. Wall Street is never going to precisely follow averages, but it does offer a reference point that declines are normal.
Although we'll never know precisely when a crash will occur, how long it'll last, how steep the decline will be, or (in many instances) what the catalyst for the decline will be, history shows that crashes and corrections are a normal occurrence. History is also pretty clear about the general time frame when these declines occur -- and it isn't good news if you're looking for this young bull market to stretch its legs.
A hand circling and drawing an arrow to the bottom of a steep downtrend in a stock chart. IMAGE SOURCE: GETTY IMAGES.
One of the biggest red flags can be seen on the valuation front. The S&P 500's (SNPINDEX:^GSPC) Shiller price-to-earnings (P/E) ratio -- a measure of inflation-adjusted earnings over the previous 10 years -- closed this past week at 37.28. For reference, that's more than double the average S&P 500 Shiller P/E dating back to 1870.
The concern is that in the previous four instances where the S&P 500's Shiller P/E ratio topped and sustained 30, the index went on to lose at least 20% not long thereafter. Precedent suggests that premium valuations like we're seeing now aren't well-tolerated for long periods of time.
History also sheds light on how the markets typically respond following a bear market bottom. At no point over the past 60 years has there been a bear market that didn't correct between 10% and 19.9% at least once within three years of hitting a bottom. We're now more than 14 months removed from the March 2020 bottom and have yet to see a double-digit percentage retracement in the benchmark S&P 500.
Additionally, stock market crashes and steep corrections are commonplace on Wall Street; they're the price of admission to one of the world's greatest wealth creators. Since 1950, we've witnessed 38 double-digit declines, or one every 1.87 years, on average. Wall Street is never going to precisely follow averages, but it does offer a reference point that declines are normal.
Comment