The media is full of people who claim they know what the economy or the stock market will do next. Some suggest it will crash again and some suggest a v-shaped recovery. The truth is that nobody knows what the market will do next and this can feel problematic for anyone who wants to start investing.After all, nobody, apart from Bill Gates predicated a global pandemic and resulting stock market crash.

Likewise, not too many people in 2011 would have predicted one of the longest bull markets in history. Herein lies the problem; people often try to time the market and wait until it hits rock bottom. They are so focused on trying to time the market that they do not invest at all, or when they do they try to dip in and out. This is the single greatest reason that people lose money in the stock market.

With this in mind, I thought I’d take a look at how the current bear market profile compares to those throughout history. Perhaps more importantly, what we should do if we’re only at the start of another crash or asset bubble. Especially one that seems as unique as the Covid-19 crash. Does history have any wisdom to offer us?

Disclaimer: This article should not be considered as financial advice. You are responsible for your own financial research and decisions.

– Andrew / Mr Money Side Up

Economic Crashes Should Be Expected

The economy has and will always continue to experience economic expansion and contraction. Likewise, there will always be speculative bubbles and economic crises. This is probably one of the concepts that most potential investors are tacitly aware of but only in the sense that they remember the impacts of recessions and austerity.

5 Of The World’s Most Devastating Financial Crises

  1. The Credit Crisis Of 1772
  2. The Great Depression 1929 – 1939
  3. The OPEC Oil Price Shock of 1973
  4. The Asian Crisis of 1997
  5. The Financial Crisis of 2007–08

The Economy is not merely prone to crises, it is shaped by them and these five historical crises shape how today’s economy developed and became regulated.

Asset Bubbles Through History:

People with a more niche knowledge of investing will also be aware of asset bubbles. For those who are not, an asset bubble occurs when the price of a financial asset or commodity rises to levels that are well above either historical norms, the asset’s intrinsic value, or both.One of the most recent examples is the speculative Bitcoin bubble in 2017, when it traded for nearly £15,000 to one £1 GBP. Other historical bubbles include:

  • The Dutch Tulip Bubble
  • The South Sea Bubble
  • Japan’s Real Estate and Stock Market Bubble
  • The Dotcom Bubble
  • The U.S. Housing Bubble

These demonstrate the problem is that the perceived intrinsic value of an asset can be severely misjudged. Consequently, a bubble is often justified by the flawed assumption that an asset’s intrinsic value has skyrocketed, meaning the asset is worth much more than it fundamentally is.

The only way to avoid investing in a bubble is to benchmark the asset to a comparable item or ask yourself if you would buy and hold it forever. Warren Buffett applies this perspective that you shouldn’t buy any stock that you wouldn’t hold for 10 years.

Unless of course you are aware of the pure speculation and you want to try and time the rise and fall of the bubble.

Remember That Bear Markets Are A Fact Of Life

Returning to the concept of market cycles. Many people might perceive bear markets and recessions as being unique crises, which make them feel like the end of the world as we know it.However, they are actually pretty common events and whilst they each have their own unique origin, to some extent they are predictable. We just never know when they will happen or why.

Can We Predict When The Stock Market Will Crash?

There is historical data which can help us interpret and understand the volatility that we are currently and will most likely experience in the future.

For example, if we look at the historical performance of the S&P 500 Index throughout the US Bull and Bear Markets we can see that the average bull market lasted 2.7 years with an average cumulative total return of 111.7%.

By contrast, the average bear market lasted 9.5 months with an average cumulative loss of 35.5%. All of this gives us an indication of what we can expect from the future of the stock market, if these economic cycles continue to repeat themselves.

From the above information we can ascertain that for every 9 or 10 years there will be a bear market lasting approximately one to two years, with the average depth being -39% and the average duration 22 months.

Will The Stock Market Crash Again?

The big question you might be asking is if the stock market will crash again in 2020. Despite the seemingly miraculous recovery of the US stock market and the S&P 500, I can’t help but feel that we are not out of the woods yet.

The US economy shrank by an annualized 32.9 percent in the second quarter of 2020 and the UK GBP fell by 21%, as US and global unemployment levels increased. Despite this stock markets have continued to recover and rise to record levels.

In the UK, house prices have also been robust and even increased for certain months, despite the imminent threat that people will start to default on their mortgage payments, as earnings drop, furlough schemes stop and payment holidays end.

This all highlights a stark contrast between what is happening and the reality of the situation. Stocks and house prices should be falling but seem to have become detached from reality. This is surely a situation that will correct very soon?

Comparing Now With Previous Stock Market Crashes

The 2020 market drop was the quicker decline into a bear market in history. Highlighting that to some extent it’s pretty unique. It took just 16 days fall the S&P 500 to fall into bear market territory compared to 188 in 2008/09.

However, to expect the market to have recovered already based on the duration of previous bear markets would be very optimistic.

During March 2020, global stocks saw a downturn of at least 25%, and 30% in most G20 nations. Although stocks entered bear market territory (defined as a 20% drop from a recent high) when compared to other bear markets and recessions you can see that stocks can easily fall by as much as 50%.

Moreover, you can see from the peaks and troughs that it’s not necessarily one steep fall to the bottom, but can happen in two or three waves. When you look at some of the initial declines, you can see that the first few drops were by no means the most severe:

What Can You Do To Protect Your Investments?

When you invest money in the stock market, you have to prepare for a market crash. It is not a case of if the market will crash but when. At this point you have to remember that selling is simply not an option and you only lose when you sell.

This is just coming from me, you can listen to the wise words of investing Guru JL Collins who has been through a number of market crashes.

Remember that when the market crashes, selling is simply not an option. More than this, you get to buy stocks when they are on ‘sale’, if the market drops by 50% then you are continuing to buy at half price.

Continue to watch the video to find out how you can also use bonds to your advantage, if you really do feel the need to smooth out that volatility. Personally, I am content to ride out the volatility without buying bonds.

Will The Stock Market Crash Again And Will You Be Ready?

When we consider if the stock market will crash again, we know for certain that is will. There is a strong possibility that it will crash again in 2020 or 2021. Even if it doesn’t crash in the near future it will undoubtedly crash again at some point.

Even once Covid-19 is a distance memory you can be assured that there will be numerous stock market crashes in the future. Perhaps 2030, or 2045 and potentially even worse than the current crisis.

Therefore, it’s necessary to be stoic in these difficult times, as taking action during volatile times can actually harm investment returns. Therefore, only focus on what you can control:

  1. Keep investment costs low
  2. Maintain a consistent investment strategy
  3. Invest when stock prices fall
  4. Diversity of your investments

Ultimately, the action we all need to take is probably no action at all, it’s simply to just stay the course and ride out the storm.