During this turbulent time, one question on investor’s minds is- “Will the stock market crash?”
Of course it will, at some point; however, the timeline, no one knows. It could be two weeks from now or three years from now.
When people question what seems like an inevitable crash, common robotic-like answers are:
-You can’t time the market!
-Time in the market beats timing the market
-Buy the Dip
-This will make 2008 look good!
A Survey of the current Environment
Around January 2020, I saw posts on social media from people that lump summed into the markets; a few months later, they were full of regret. Of course, those that held on and didn’t panic sell were happy campers. Fast forward two years later, those that stayed the course were even happier with the returns. It was essentially the chance of a lifetime to create even more wealth. Currently, those same feelings of regret are popping up-those that maxed out their retirement accounts at the beginning of January are feeling like maybe they should have waited.
Also, there are those investors that bought the dip and are out of cash. I’ve also noticed some people converting to the BOGLEHEAD MINDSET. They went the way of individual stocks and are feeling the burn. For more information about Bogleheads visit:
What if we are in a new territory with our monetary policies and it could lead to dark times? What if it is years before we make a new all time high? What then? Are we the next Japan? (never mind Japan couldn’t get inflation).
Your level of fear may depend on where you’re at in the accumulation vs. retirement phase. If you’re 20 years old, it’s hard to imagine we have 20 years of nothingness in our future. If that’s the case, you’ll probably have more worries about your career and putting food on your table. If you are 60, should you be 100% equities?
Personally, My investing motto has always been, spend more time on the things you can prevent than the things you can’t. You can’t stop the market from crashing. However, you can prepare for the worst.
This involves things such as:
- Not risking more than you can stand to lose
- Have a Diversified Portfolio
- Holding multiple asset classes
- Holding different sizes of equities (Large/Small/Mid Cap)
Truthfully, the time to think about all of this was BEFORE the latest correction. However, it’s okay to admit you were/are too aggressive.
I’ve personally scaled back my equity exposure to 70%; however, keep in mind, I am in my early 40’s. I also have about 11% cash to buy any dips in the near future. I always stay invested no matter what; yet, I want enough cash to be able to pick up some nice deals as they arise.
Let’s look at some hard data:
ITOT, my personal favorite total market ETF, is down 12.14% counting dividends. 52 week performance is a little over 3%. Meanwhile, if we look at the Nasdaq index, it is down 17.90% YTD. The current PE of the S&P 500 is 23.68 and 30.35 for Nasdaq.
Worse come to worse, I could see the S&P reaching a PE of 17 (approx 28% more downside) and Nasdaq at 25 (-17.4%). This all sounds bad; however, one must keep in mind that Valuations are not great predictors of whether the market will go up or down long-term. I don’t believe we have a Nightmare on Elm Street moment whereby the S&P gets back to a PE of 15. Keep in mind, even though markets correct hard and fast, they also can go blazing up and the correction is nothing more than a distant memory.
Currently, the 10 year keeps flirting with 2% but hasn’t stuck. At 7% inflation, a 2% yield doesn’t offer much help. Until rates move up towards 3%, I don’t see people pulling out for the safest assets.
It seems a bit late to go all cash.
What are some Possible stock market outcomes?
1)Did the market make an assumption about the FED raising interest rates more than they actually will? In that case, the markets move up to the upside before the end of the year?
2)Russia-Ukraine tensions cool off and the market responds in kind?
3)The market behaves much like it did in December 2018 and falls even further as interest rates are enacted?
4)There is an extended period of sideways action from the market where gains are quickly losses and losses are quickly gains. This sort of thing is what I call a trader’s market.
5)We see the worst market crash since 1929?
I am personally bearish on the markets for the time; however, I don’t see another 30% downside. If anything, we might have another 15-20% to go from here.
What does an increasing rate and high inflation mean for investors? I guess we are all about to find out!