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What is meant by a Stock Market Crash?

Is Stock Market Crashing Again?

Stock market crash are often connected to drastic events or economic crises, but they can also be caused by public panic that leads people to sell their stocks.

The most infamous stock market crashes have been the 1929 Great Depression, Black Monday of 1987, 2001 dot-com bubble burst and 2008 financial crisis. The 2020 COVID-19 pandemic will be the next severe crash to hit markets around the world.

We can’t always know when a stock market crash is going to happen. However, they’re often associated with huge drops in the value of stocks over just a day or two days that are typically at least 20%.

Stock market crashes are often very disruptive to the economy, selling shares too soon after a sharp drop in prices can lead to investments being lost while buying many stocks on margin ahead of time is even more dangerous because investors lose money when markets crash.

The 1929 market crash and Black Monday (1987) are well-known U.S stock market crashes that occurred because of economic decline, panic selling, and sparked the Great Depression and a major recession respectively in both cases.

The housing market crash of 2008 is often referred to as The Great Recession. This disaster was one major cause for what became known as “The Depression.” A flash-crash occurred 10 years ago as well, which was caused by high-frequency trading among other factors.

In March 2020, stock markets around the world declined by 20% because of the emergence of a pandemic that will wipe out 5.7 million lives due to COVID-19 corona.

Preventing a Stock Market Crash

preventing stock market crash

Circuit Breakers

People are afraid of crashes like 1929 and 1987, so they create rules to stop panic. These include trading curbs which protect the market if it goes down too much by stopping all stock sales for a certain time period after sharp declines in prices.

Plunge Protection

J.P Morgan, the famous financier and investor, used his personal capital to help stabilize markets during a financial panic in 1907 when stocks declined by 50%. He convinced New York bankers to step in as well but this method has yet been proven effective at curbing market crashes which is why many are still weary of it today.

Investors have enjoyed a historic rally for the past 17 months. Since bottoming out on March 23, 2020, the broad-based S&P 500 has doubled in value and we’ve never seen such an event happen before.

But are you also thinking that there is going to be another stock market crash in the near future?

As we all know, the future is uncertain. Despite this uncertainty, there are plenty of sources to look towards when trying to predict what will happen next for the S&P 500 and your portfolio.

The current economy and trading patterns indicate that a steep correction is growing more likely.

The S&P 500’s Shiller price-to-earnings ratio is one of the most important indicators that a decline might be in store for the stock market.

Based on the Shiller P/E, which is a price-to-earnings ratio that’s better correlated to market returns in hindsight than forwarding projections of earnings growth, or any other valuation method for that matter. The average since 1871 has been 16.84 (and by our definition roughly 20% below where we are currently).

On Monday, August 16th, based on S&P 500’s Shiller Price Earnings Ratio – investors saw it reach 38.91; this was an almost two-decade high when compared with its long term average at around 19%.

The democratization of financial data has helped companies to expand their earnings multiples over time. 

However, despite these higher ratios, history shows that it does not end well when this ratio reaches 30 or more as shown in each instance where it happened previously. This turned into a loss of 20% at least every time which lost about 1/5th its value.

Excluding the corona crash, there have been eight bear markets since 1960. Eight of these featured at least one pullback of 10% (or greater) within three years.

The market has historically bounced back from bear-market bottoms with two double-digit percentage pullbacks within three years of hitting a trough. However, this isn’t always the case and we could experience significant downside because of it.

The average time between S&P 500 crashes or corrections is 1.87 years according to Yardeni Research, so stay vigilant for when the markets have a tough go of it.

Investors shouldn’t be surprised if a stock market crash is coming, according to the above data. Crashes and steep corrections are normal parts of the investing cycle based on this data.

But You should also consider this –

While the price of a stock might rise and fall, there are many advantages to being a long-term investor as they invest in long term assets. Although historic data shows that corrections happen often in the market, it also clearly illustrates how patient investors can benefit from buying great companies on any weakness.

If you want to invest in the stock market, it is important that you don’t panic during a crash or correction. Even though there are no guarantees on investment returns, if an investor holds onto their stocks through all of history’s crashes and corrections (38 out of 38), they will come out ahead at some point with double-digit gains.

Investors in the S&P 500 would have had a lot to be excited about during this time period. The rolling 20-year returns of the index showed that only two years produced an average annual return below 5%. Meanwhile, 40+ end years yielded at least 10% annually bringing investors back more than they initially put in.

Tracing the history of market returns, if you bought into the S&P 500 and held it for at least 20 years between 1919-2020 your initial investment grew.

The S&P 500 is made up of the world’s largest companies. These are profitable, time-tested businesses that can benefit from long periods of U.S and global economic growth relative to contraction.

In conclusion, it’s important to keep in mind that while crashes and corrections often happen, they usually don’t last long. The average correction in the last few decades has only lasted around five months, while back before this time it would take about six. Compared with bull markets which measure years on end; bear ones are short-lived.

In the end, I think that investing in great companies and staying with them is a proven way to build wealth.

If Stock Market Got Crash then you should invest in these companies-

investment alternative other than stocks

If a stock market crash does occur in the near future, adding these three stocks to your portfolio would be perfect for patient investors.

Visa

Visa is a payment processor that benefits from the expansion of the US and global GDP. Visa has been able to take advantage of increased spending because periods of growth last longer than recessions.

Visa is a leading provider of payment network services that won’t have to set aside cash if credit card delinquencies rise during a recession. This is the big reason why Visa’s profit margin is consistently above 50%.

Intuitive Surgical

The demand for healthcare stocks offering dr*gs, devices, and operating systems are steady regardless of the stock market. Therefore we should invest in robotic-assisted surgical system developer Intuitive Surgical (NASDAQ: ISRG).

Intuitive Surgical is dominant in the assisted surgical space. Their installed base of 6,335 da Vinci systems is unmatched by any competitor. The high cost (of $500,000 to 2.5 million) and extensive training required for use make it unlikely that its users will switch over anytime soon.

Over time, Intuitive Surgical’s operating margins are expected to expand due to the fact that they sell surgical instruments and accessories with each surgery as well as service their robotic systems. Their installed base is growing which will also help grow their operating margin.

Duke Energy

Investors should buy shares of electric utility stock Duke Energy (NYSE: DUK) if volatility picks up and the broader market heads lower.

Duke Energy has a 3.7% yield, which is healthy for investors because of the predictable profits and market-topping dividend yields due to demand for electricity not changing much from one year to the next.

Duke Energy’s renewable investments are expected to grow the company’s electric generation costs and lift its growth rate. The U.S. ‘s move towards green energy will benefit shareholders like Duke who transition over to renewables, in an attempt to reduce their carbon footprint and fight climate change at the same time.

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