Other than politics and sports, nothing is more predicted or discussed than the stock market. Will it go up or will it go down? And if does go down when will it go back up? All questions that economists, pundits and investors ask and attempt to answer. But the question everyone seems to be asking of late – is the stock market about to crash?
To answer that question, let’s first look at where the market has been over the last 100 years;
The graph above is adjusted for inflation and shows the Dow Jones Industrial Average for the last 100 years.
It shows a large drop from the 1929 crash and the slow general increase in the 1950’s and the early 1960’s. Due to inflation in the late 1960’s and 1970’s, the market actually lost value. However, beginning in the 1980’s, the market began to rise, rising very fast in the 1990’s, then falling in what was called the, “tech boom and bust”. The market recovered to almost historical highs until the 2008 “Great Recession”, after which it began to recover to where it is today – to historical highs.
In regards to the stock market today, many readers may agree;
“The stock market was created long ago as a method for people to buy and sell a company’s stock based on the financial performance of the company. If the company was not making a profit, then the stock would go down. But if a company made money and profits, the company would be rewarded with a higher stock price.
Today, however, the stock market is more a reflection of the actions of the Federal Reserve, not of individual company or sector performance. If the economy and business profits matched the current historical highs of the stock market today, the United States would be in the midst of an economic boom as one has never seen before – which it is not.” – Undisclosed private investor.
Why is the market out of sync with the economy? The answer is simple, though not widely discussed; the Federal Reserve has held interest rates at near zero since 2008-2009. As a result, investments such a treasury bills, certificate of deposits, municipal Bonds and business bonds have yielded very low rates of return – by historical standards.
Since yields on interest-bearing investment products are so low, investors have bought stocks – often with little regard to the actual health and long-term viability of the companies in which they are investing – as a result, the stock market is now at all-time highs. Are these all-time highs going to continue?
Nothing man-made continues forever, so this bull market (an upward trending stock market) will end. And when a bull market ends, a bear market begins (a trending down stock market.) And over the last 100 years, long-term bear stock markets (downward trending) eventually take-back at least 1/3 or more of the previous bull market gains. Using that historical norm, one can expect the next bear market to force the Dow down into the 14,000 – 15,000 range, or a 20-25% long-term correction. With the correction possibly taking several years. More than likely, this long-term bear market will begin when the Federal Reserve begins trending interest rates up on a consistent and timely basis
Short-term (meaning one or two-day) stock market corrections, often called “crashes” are limited by stock market “Circuit Breakers” or “Curbs”. Though they attract mass media attention, in reality, large short-term (one/two-day) market corrections or crashes should be viewed as sideshows to the more important long-term direction of the market. Small investors often panic over a one or two-day stock market correction (crashes), while large institutional investors see buying opportunities – often at the expense of the small investor.
Stock market crashes are often temporary, and can be caused by many factors; black swan events, economic or political news or even technical glitches – and can happen at any time. Often, large losses from these temporary events can and are mostly recovered in the days and weeks after the event. Long-term stock market movements, of a one to three-month duration, are a far better sign of the general movement of the market. And that long-term downward trend will begin when interest rates begin their rise.