“Will the stock market crash soon, Justin?” I hear it all the time! One knows the answer to that question for sure, BUT there are a few indicators we can utilize to predict when and if the stock market will crash.
The markets are at an all-time high right now. So of course, the obvious question is, “Will the stock market crash soon?”. While most people ask me when a “Crash” will happen, the more financially educated people ask me when this “Bull Market” will end. So what does that mean? Simply put, a Bull Market is when stock prices consistently rise which encourages buying. Can you believe that in 2017 we’re already nine years into this type of market? That’s crazy to me! This is the second longest climb in the history of the stock market.
Now, one thing to know is that markets don’t always take a dive. Just because they’re going up and prospering for a long, continuous time doesn’t mean they will all of a sudden stop and fall off.
If a market drop does occur, we have what is called a “Bear Market,” or what some people like to call “a Crash.” Literally defined, the Bear Market occurs when the stock market drops 20% from its peak. With one exception, the “flash” Crash of 1987, Bear Markets don’t just happen for no apparent reason. No one saw that Crash coming; the market just dropped. Boom!
I know people are listening to doom and gloom predictions. They aren’t researching historical statistics and trends.Click to tweet
So when I hear the question, “Will the market crash soon?”, I know people are listening to doom and gloom predictions. They aren’t researching historical statistics and trends.
Well then, when will the market fall? No one has a clue. That makes my job as a CERTIFIED FINANCIAL PLANNER™ difficult. In fact, the hardest part of my job is trying to convince people to keep their money in their current investments no matter what the market does.
Research shows that a Recession, or a downward turn in the market, occurs 7.7 months after the market hits a high. Therefore, we can look at certain indicators to predict when a crash might occur.
Every Recession since 1960 has been preceded by a year-to-year decline of new residential construction builds. In June 2017 the nation showed a 2.1% increase in new housing starts. This would seem to indicate that a Recession is NOT coming anytime soon.
Typically, the public’s positive opinion about the health of our economy declines by about 9% before a Recession. According to the University of Michigan monthly Consumer Sentiment Index, though, consumer sentiment increased by 3.8% in July 2017 compared to the same month over the previous several years. Therefore, consumer sentiment does not reflect trends leading up to a Recession.
Additionally, an average 3% decline in The Conference Board Leading Economic Index® over a 6 month period reveals a potential for Recession. However, the first half of 2017 showed a 2.6% increase in LEI. That, again, leads us to believe Recession is not near.
Popular on the news, when the 10-year treasury yield drops below the yield of the one year note, the nation experiences what’s called an inverted yield. When this happens, we can say a Recession may be coming, but that’s just not happening right now.
Why do I go through all this? Because the biggest mistake we can make, as investors, is jumping out of the market too soon. Studies show that the average 12-month return leading up to a Bear Market is about a 25% return on your investment. Six months before, investors experienced an average of 16% ROI. So if you were to jump out of the market today, and the peak was a year from now, you could lose 25% appreciation on your assets.
The key here: do NOT panic! If you’re concerned the stock market will crash soon, talk to your financial planner or this CERTIFIED FINANCIAL PLANNER™ (me). Confirm that your portfolio matches your long-term goals and then go from there.
So will the stock market crash soon? No one knows because no one can predict the future! NO ONE!!! If I could predict the future, I’d be on a beach in Bora-Bora somewhere.