Will The Stock Market Fall?

The March 2020 market crash was a shock to the global economy. Anxiety around the emerging COVID-19 pandemic had investors worried, causing a mass selloff. From February 12th to March 23rd, the Dow Jones Industrial Average went down by 37 percent. 

On March 13, 2020, Federal Reserve Chair Jerome Powell remarked that “The scope and speed of this downturn are without modern precedent, significantly worse than any recession since World War II.” 

By the end of May, roughly 22 million US jobs disappeared, and the prospect of a deep recession loomed. However, thanks to swift action by Congress, the Federal Reserve, and the Treasury Department, those fears were not realized. 

The market began trending up over the summer, and the Dow Jones Industrial Average crossed the long-sought-after 30,000 threshold on November 24th. By the end of the year, it was up 7.2 percent, and the S&P 500 gained 16.3 percent – March crash notwithstanding. 

Against all odds, the economy was booming again in many sectors, leading to a new concern. Can the recovery be sustained, or is it artificial? Will the stock market fall? 

Will the Stock Market Crash? 

The only thing that is certain about the stock market is its unpredictability. Even the most experienced analysts struggle to create consistently accurate forecasts. That is due, in part, to the many factors that contribute to market behavior. Examples include: 

  • Investors’ level of confidence – and their level of fear
  • Interest rates 
  • Exchange rates 
  • Supply and demand
  • Successes and failures within individual companies
  • World events 
  • Politics 
  • Natural disasters and incidents of severe weather 

These factors are unpredictable by their very nature, which makes it all but impossible to know what the market will do next. 

With that said, market experts have carefully studied historical patterns, and they have had some success in applying learnings from those patterns to analyze current data. The bad news is that current data suggest that a stock market crash is coming. 

Stock Market Predictions for 2021

The first point that has analysts concerned is the S&P 500’s Shiller price-to-earnings ratio. This is also known as the P/E 10 ratio or the cyclically adjusted price-to-earnings (CAPE) ratio.

In a nutshell, this figure measures inflation-adjusted per-share earnings for a ten-year period. The benefit of this method of evaluating the market is that it removes short-term fluctuations based on the factors listed above. 

As of August 16, 2021, the S&P 500’s Shiller P/E ratio was 38.91. That’s the highest it has been in almost 20 years. While there are legitimate reasons for the ratio to reach new heights, extremely high Shiller P/E ratios have historically led to a market crash. In fact, the last four times this ratio exceeded 30 for an extended period, a 20+ percent drop followed. 

The second pattern that suggests a coming market crash is related to how the market has historically responded to recovery from its deepest lows. Between 1960 and the 2020 crash, the market has bottomed out eight times – though not always as dramatically as the 2020 crash.

Within three years of each recovery, there have been corrections of ten percent or more. Since the 2020 crash, the market’s trajectory has been almost entirely positive. If patterns hold, that trend won’t last. 

Finally, it is worth noting that from 1950 to present, the market has seen a total of 38 declines in the double-digits. In other words, drops of ten percent or more occur an average of once every 22 months.

That doesn’t mean a drop will occur exactly 22 months after the March 2020 crash – that timeframe is an average, so the interval can be longer or shorter. The takeaway is that a drop is all but inevitable, and it may come sooner than expected.

How To Protect Your Portfolio From Market Volatility

While it appears that the stock market will fall – and likely in the near future – that doesn’t mean investors should start selling. There is a simple solution for riding out even the most pronounced market drops: buy quality stocks and stay the course. 

The data show that ups and downs – even big ones – are part of normal market behavior, so what goes down is almost certain to go back up. Of course, that doesn’t apply to individual companies, but a carefully diversified portfolio that includes strong, reliable stocks is likely to regain any losses that result from overall market conditions. 

Selling your assets in a panic makes it nearly impossible to recover the value of your portfolio when the stock market falls. Instead, be patient, continue buying the now heavily discounted shares, and trust that the market will repeat historical patterns and return you to profitability over time – and by the way, it might not take as long as you think. In a majority of cases, corrections last less than a year. 

The Best Stocks To Buy For a Market Crash

Most high-quality companies can recover from a market downturn within a reasonable timeframe, but some are able to remain relatively stable regardless of market ups and downs. Examples include:

  • Amazon – The e-commerce giant has far more in the works than its online marketplace. It is a market leader in cloud services, and it is developing a wide array of products that leverage next-generation technology. Consumers and businesses are unlikely to leave Amazon, regardless of market conditions. 
  • Duke Energy – This electric utility is already a winner given the stability of energy demand and its 3.7 percent dividend yield. It is even more interesting because it is leading the way in developing new infrastructure projects. The company plans to put up to $60 billion into such projects through 2024 – much of it focused on renewable energy options. 
  • Visa – This financial services company makes its money by facilitating card-based transactions. It doesn’t actually extend credit to consumers. That means limited risk as compared to other financial service providers, even if market conditions sour. 

Will The Stock Market Fall? The Bottom Line

The bottom line is that the stock market will almost definitely fall at some point, and that fall might come sooner rather than later if historical patterns repeat. However, that doesn’t have to spell disaster for confident investors. 

A portfolio made up of quality stocks is more likely than not to recover its value over time, and with the addition of certain recession-proof stocks, it may not lose much of its value at all in the event of a 2021 market crash. 

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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.