There hasn’t been a stock market crash for a year, and according to some people, the next one is overdue. The doomsayers are out in force again, warning that today’s frothy stock market has been whipped up by artificial stimulus and will go off the boil.
There are plenty of reasons why people might say the stock market is overvalued and ready to crash. We are still in the middle of a global pandemic, with no immediate end in sight, yet shares are trading higher than they were a year ago.
How can that be? Global GDP crashed last year, as businesses were shuttered and people confined to their homes. Millions risk losing their jobs in the UK, while many more have scraped by on government furlough support.
Covid meltdown was over a year ago now
How can the stock market boom at a time like this? You know the answer to that. Global fiscal and monetary stimulus now runs to trillions of dollars, preventing meltdown. Effectively, politicians and central bankers are underpinning share prices, preventing a crash.
There is another reason people worry about a crash. The world’s biggest stock market, the US, has enjoyed the longest ever bull run, now 12 years and counting. It is displaying many characteristics of late-stage bubble mania. Witness the furore over GameStop, Bitcoin, Tesla and non-fungible tokens. The Financial Conduct Authority has warned that young investors in particular treat investing like gambling, and expect get-rich-quick returns.
Investors lose their heads in the months before a stock market crash. I remember it happening in 1999, at the height of the dotcom boom. So are the doomsayers correct and should we all run for cover?
That is a simple and truthful answer. You might find it disappointing though.
Nobody knows.
Stock markets crash regularly, but nobody can consistently predict when they will. If someone does call a crash correctly, they crow about it for years. What they rarely do is call the next stock market crash as well.
Remember John Paulson? He made $15bn in the 2008 crash, after spotting trouble in the sub-prime lending market. It has been called the greatest trade ever. But Paulson struggled to repeat his triumph.
You can’t time a stock market crash
There are countless stories like those. Spotting stock market shifts and crashes is impossible with any consistency. I know my limitations, so I never try. I didn’t predict the last 10 stock market crashes, and I’m not going to predict the next 10 either.
Since I don’t know when the market will crash, I don’t worry about it. Instead, I buy a balanced spread of shares and index trackers, with the aim of holding them for the long term.
If the stock market does crash, I will not sell. Instead, I will buy more shares at the reduced price. History shows that stock markets always recover in the end, if you give them time. That will happen after the next crash too.