Before we get into the reasons why I think there is a market crash ahead of us, I want to get things clear about what I will say here.
I won’t be pretending that I have the divine words of God, being pretentious is not in my nature.
Although, I will give you sound reasons why I believe in what I will say.
Let’s first start by making the distinction between a market crash and a recession because they can be mixed up.
First, a market crash can be defined as a sudden drastic decline in stock prices or a brutal change of heart of investor’s sentiment toward the stock market.
Unfortunately, there is no precise percentage decrease that can be classified as a market crash.
But we can somehow have an idea of what it might be by going over how a market correction and a bear market can be identified.
It can be said that there has been a market correction if a decrease of at least 10% has occurred and for a bear market downfall of at least 20% over a sustainable period of time.
Consequently, we can say that a market crash can be somehow in between since the downfall can be sudden or even further than that as we will see later.
Let’s take the past as the basis of my reasoning.
The reasons for the most prominent market crashes
1929: Three days characterize this crash, Black Thursday (October 24, 1929), Black Monday (October 28, 1929), and Black Tuesday (October 29, 1929)[i]. In all those days the market declined sharply causing the bankruptcy of thousands of banks, enterprises, stockbrokers, and individual investors[ii]. There wasn’t a single cause to the crash but mainly it was influenced by the increase of interest rates.
It influenced many investors to sell their stocks in order to invest them in the bank.
Which caused panic in all the other investors who ran to sell their stocks, causing an even bigger decline of the share prices.
1987: It is believed that this was caused by technology, more precisely computer trading. Shares were bought or sold automatically when they reach a certain price. When the prices started to decline, a ton of stocks was sold causing the market the drop even more.
2000: Called the dot.com crash, affected mainly the technological sector. It started off as a bubble, everyone was putting money in any stock traded in the NASDAQ without looking at their numbers. There was euphoria, people were buying shares blindly. According to an article published by CNN, the crash was triggered by the news of some dot.com companies that started laying off or reported losses[iii]. Like in the other market crashes, panic got into people and they started selling stocks in raves.
2008: Since this one is the closest, everyone has a piece of good knowledge about it, so I won’t spend time about it.
Mainly, the crash was caused because of the recession.
The reasons I believe there is a market crash ahead of us:
- As in the dot.com bubble, everyone is way too euphoria about the NASDAQ stocks.
Investors are speculating like crazy!
It just doesn’t make sense that the stock market has reached an all-time high in a time of the pandemic. In my opinion, a stock price should increase as his profits increase.
But what is happening now, is just speculation.
Everyone is watching the stock market with rose-colored glasses like if businesses were doing even better in the pandemic.
As of October, the U.S was still down 10 million jobs before the pandemic started[iv].
- Almost every 10 years there has been an end to a bull market and the beginning of a bear market.
And I personally do not consider the one caused by the coronavirus to count as an end of a bull market cycle.I think the cyclical one is about to come.
Ok, then what I should do?
- You should not buy on margin. The crash that happened in 1929 can confirm this.
- If your planning on withdrawing your money in the next 1-3 years you should change the allocation of your portfolio by decreasing your portion invested in stocks.
If you are reading this blog post, it’s because you have concerns about your money.
So when in doubt, it’s better to be cautious.
- Newly invested money should go toward bonds and cash.
It will give you the opportunity to buy stocks at discount.
I hope this post has helped you see things clearer.
[i] https://www.history.com/topics/great-depression/1929-stock-market-crash
[ii] http://www.cvm.qc.ca/pitlamon/module08.htm
[iii] https://money.cnn.com/2000/11/09/technology/overview/
[iv] https://www.cnn.com/2020/11/06/economy/jobs-report-october-2020/index.html