If there’s going to be a UK stock market crash, it’s most likely that it will originate in the US. As the old City saying goes: “When New York sneezes, London catches a cold”. That said, the past 12 years have been the most wonderful period for buyers of US stocks. Share prices have gone up, up and up — and almost to the sky.
The stock market mega-boom
The S&P 500 — the main US stock market index — has soared since the dark days of spring 2009. On 6 March 2009, the index briefly crashed to an intra-day low of 666 points. This biblical ‘number of the beast’ certainly terrified investors that day. But it also marked the end of a brutal stock market crash that began quietly in mid-2007, before gathering pace.
As I write, the S&P 500 stands at 4,617.78 points. That’s more than 3,950 points above the 666 bottom. Thus, the index is close to seven times its low point, soaring by 593.4% in 12 years and nine months. And this doesn’t even include more than a dozen years of cash dividends. This is the biggest and longest bull market I’ve witnessed in 35 years as an investor. So why worry about a stock market crash today, right? Wrong!
High valuations produce fragile markets
From the chart below, the S&P 500 has recorded only two losing years in the past 13, plus a zero return in 2011. Hence, the index has climbed in 10 of the past 13 years. Again, these figures exclude dividends. To me, this pattern is highly abnormal in historical terms. After such a powerful and sustained winning streak, a stock market crash must be more and more probable, right?
| Year | Gain/Loss |
| 2021 YTD | 22.8% |
| 2020 | 16.3% |
| 2019 | 28.9% |
| 2018 | -6.2% |
| 2017 | 19.4% |
| 2016 | 9.5% |
| 2015 | -0.7% |
| 2014 | 11.4% |
| 2013 | 29.6% |
| 2012 | 13.4% |
| 2011 | 0.0% |
| 2010 | 12.8% |
| 2009 | 23.5% |
But there seems to be one powerful reason behind these exceptional returns. To stave off another Great Depression, major central banks and governments poured tens of trillions of dollars, pounds, euros, yen and more into supporting their economies and financial markets. As a result, this enormous tsunami of money has driven asset prices relentlessly higher for years. Yet the higher prices rise, the more fragile markets become. Today, I see bubbles in US stocks, government and corporate bonds globally, real estate, and cryptocurrencies. But what might trigger a stock market crash?
Stock market crash: immediate causes
My best guess is that 2022 will be US stocks’ worst year since 2008. Why? First, the US Federal Reserve is ‘tapering’ — scaling back its $120bn-a-month bond purchases. This should lower US bond prices and raise their yields. Second, with US inflation at a 30-year high, the Fed is set to raise interest rates in 2022-23. This might happen as early as June 2022. Also, with global growth slowing down, the next cyclical recession might arrive in 2022-23.
In other words, a highly favourable and supportive environment for stocks could come to a grinding halt next year. Or I could be wrong and the boom will keep going, just as bullish Wall Street banks claim. So, what am I doing to reduce my losses from a possible stock market crash? First, I have zero exposure to high-priced bonds or volatile cryptocurrencies. Second, I no longer pump money into expensive US stocks. Third, I’m building a cash war chest to invest when markets next slump or crash. Fourth, I’m focusing my search on large-cap value stocks, of which I see plenty in the FTSE 100 index!