When Will The Stock Market Crash? Predicting how the stock market will perform during and after a pandemic like COVID-19 brings up a lot of challenges.
At the beginning of the year, the S&P 500 was doing quite well. It peaked in mid-February at 3,370.29 points. Things changed quickly, though. By March 23, the S&P had plunged to 2,237 points. A lot of people lost a lot of money over a month.
Somewhat amazingly, the stock market rebounded – big time – as the United States and other countries went into quarantine. Despite record unemployment and closed businesses, the S&P managed to claw its way to 2,868.44 points by the end of April.
The mild recovery looks pretty good to most traders. Investors who bought low-valued stocks in March made sizable returns within a month.
The market’s recent volatility begs an important question, though. When will the stock market crash? As it has so many times in the past, it’s bound to happen again. But when?
The Stock Market Will Peak Before It Crashes
There isn’t much doubt that the Fed lowering interest rates to 0.25% helped fuel the market’s partial recovery. So too the trillions in dollars of stimulus supported the market.
It’s noteworthy that the March 23 stock market bottom coincided with the Federal Reserve announcing it would write a virtually limitless check to support the plunging markets.
Without the Fed’s action, stock values probably would have kept falling.
Plenty of investment experts say that they think the stock market will peak on May 20, 2020. According to Nordea’s Andreas Steno Larsen, correlating M2 with stock market movements leads to a stunning observation.
The market lags M2 by about 8 months. After May 20, expect to see a sudden drop according to the Nordea expert.
A Stock Market Crash Is Coming
Low interest rates can’t support the stock market forever. Eventually, traders will have to come to terms with a grim reality: borrowed money needs to get repaid at some point. When that reality sets in, the S&P may go into a free fall that will probably look a lot like the crash that happened in March. Of course, it could be even worse than the earlier slump.
It’s impossible to predict precisely what will happen, but you should brace yourself to see the stock market struggle throughout 2020. Actually, you should prepare for the worst because the divergence between stock market gains and economic reality could not be more stark.
Record unemployment, significantly lower earnings forecasts, thousands of businesses gone, major companies declaring bankruptcy…. and yet the market rallies north of 30%?!
If the forecasts are right, rock bottom will probably come in early 2021, around the same part of the year that the market fell in 2020.
Is it scary to think that the market will fall so far? Absolutely! Does it mean you should pull all of your investments and sit on your money until a recovery happens? Well there’s a reason the old rule is Cash is King!
You won’t be happy you followed Ray Dalio’s “Cash is Trash” headline when markets fall. But there are ways to stay invested and protect your downside risk.
A collar trade limits risk on stocks you already own. Shorting the stock market or buying bearish ETFs is another option.
Every downturn creates opportunities for growth. You will hate watching your portfolio’s value diminish over 2020 and early 2021 if markets do fall and you’ve taken no measures to protect or hedge your portfolio.
At the same time, you can use the low prices to buy up as many stocks as possible. Eventually, the market will boom again. When that happens, your portfolio will blossom because you stayed true to your investment strategy and kept buying, even when it felt like a bad idea.
The Stock Market’s Recovery Will Shock Investors
Over the next year, a lot of investors will become overly pessimistic. They’ll sell stocks at low prices because they’re scared of losing everything. When the stock market recovers, they will hate themselves for missing such a remarkable opportunity for growth.
The Fed’s low interest rates helped the S&P recover for a short period. The low rates gave traders confidence that the government would do everything possible to keep the economy going.
What a lot of people don’t realize, though, is that money from low-interest loans hasn’t even reached most companies, yet. The money has potential, but it hasn’t been unleashed. You won’t see the real economic benefits for about a year.
When the tsunami of money hits the market, stock prices will grow so quickly that it will shock investors. The S&P’s value could increase by more than 40% from the previous year according to some financial experts.
Just think about how much the value of your portfolio will grow! As long as you have been buying stocks during the downturn, you could partake in any sharp bounce backs that occur.
Some lower estimates suggest that the S&P will rally by 20% after it finally hits bottom. Historically, the stock market grows by about 10% over time. Obviously, there are highs and lows. When you look at the market’s history, though, you can generally expect your investment to grow by 10%.
In other words, smart investors who stay with the market during the upcoming crash stand to make two to four times more than usual! This is a rare event that will turn some people into millionaires.
The Positive Effects of Market Volatility
Market volatility often sounds like a bad thing because most investors like consistency. Big surprises scare them because they don’t know what to expect next.
Smart traders, however, know that market volatility creates opportunities for unprecedented growth. Let’s look at some numbers to see how the market’s crash and rebound could benefit investors who stay the course.
Let’s say your portfolio has a value of $100,000 after the market drops. Through the downturn, you add $20,000 to your investments. Some people think you’re crazy to keep $120,000 in the market during such tumultuous times.
If the market were to surge, look at how much money you stand to make. With a $120,000 portfolio, you could earn somewhere between $24,000 and $48,000. That means you would have a portfolio worth up to $168,000!
Perhaps you’ve been investing for a few decades, so you have a portfolio worth $1 million. A market surge translates to gains of between $200,000 and $400,000!
Who Will Benefit From the Stock Market Crash?
Not everyone will benefit from the stock market crash. Some companies could go bankrupt during the downturn. If you own stocks in a bankrupt company, your portfolio’s value could fall significantly. That’s the risk of investing. JC Penney, Neiman Marcus, and Macy’s are among the casualties on the hit list.
High risk, however, also means high rewards. The investors who benefit from the stock market crash will pay close attention to market fluctuations and the news. And they’ll use that knowledge to build high-performance portfolios that earn them thousands of dollars. It only works when you make smart, informed choices.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.